Digital transformation in banking – how to ensure success?

The term digital transformation has been bandied around the banking and financial services industry for many years now, but despite the hype, for most banks, their digital transformations have a long way to go before completion. 

This is not a criticism of banks because the complexity of transforming a regulated institution into a digital-first organisation cannot be understated, despite the new technologies and wealth of knowledge that is making this goal more attainable.  So much has been written about what banks are doing wrong, but what does it look like when they manage to get their digital transformation right? I’ve been working in the banking industry for three decades, helping financial institutions bring in the right technology solutions to power their business. In my view there are three fundamental steps that banks must take in order to achieve true digital transformation, these are:

1. Drive digital transformation from the top

Digital transformation involves a lot more than merely implementing new or improved technologies; instead it requires a complete rethink of how the business is run across the organisation and close collaboration between business and technology leaders. A successful digital transformation strategy must involve informed technological decisions from those with IT experience so the technological capabilities can be developed and aligned in lockstep with the bank’s strategic priorities. Traditionally, a bank’s IT functions have tended to have been viewed separately from core business strategies and CIOs typically not included in strategic decision making. This antiquated arrangement must change if banks are to effectively incorporate modern technologies into their business. Technology is everywhere so a digital transformation requires an organisational shift. By taking this first step, banks can then work towards achieving alignment between IT and their core business.

Together with making changes at a leadership level, banks must also make changes to their current way of working. Digital transformation is a long-term process, yet banks tend to operate with a short-term mindset, typically focussing on a 12-month funding cycle and the prioritisation of in-year returns. The risk-averse nature of banks also tends to result in committee structures being established to oversee transformation projects, a setup which further slows the pace of change. To move like a tech company, banks must think, act and work in the same way as a tech company. This means abandoning their short-term mindsets and overly bureaucratic decision making and moving towards a more agile business model which encourages cross-functional collaboration and customer-focused decision making.

2. Reduce the technology burden

Technologies are there to support a business towards achieving its objectives, and yet, many banks find themselves constrained by their technology stack. This is because all too often banks running on legacy systems have built up a significant technology ‘debt’, resulting in a sprawling, monolithic, siloed framework that ultimately weighs the business down. As a consequence, banks find themselves spending a fortune just to keep up yet stand still! 

If you consider neobanks or incumbents who have been successful in their digital transformation, you can see that they do not have these problems because their banking platforms are lightweight, easy to maintain and support rapid development and deployment of new financial products. These modern platforms are hosted in the cloud, and utilise APIs for simple, easy integration, all of which provide tangible benefits over traditional banking technologies. The only question is, how should banks transition to them?

3. Take a gradual approach to transformation

One of the most critical decisions a bank needs to make when considering digital transformation is how best to transition from the old to the new. Ultimately banks have two options; they either ‘rip out’ their existing system and switch to a new one or they take a gradual approach to migration.

While the logical solution might seem to be to completely replace legacy systems with an entirely new platform, this is not an easy option. The process is extremely time-consuming, complex and expensive. The German bank Apobank, for example, invested a three-digit million sum in the switch and it took four years to launch the new system. And aside from the expense, while transformation takes place, banks remain at a technological standstill; innovations are impossible until the changeover is complete and this can lead to banks compromising themselves and losing market share.

The option therefore of gradually shifting services to a new system, in my opinion is a no-brainer and there are many advantages to the approach. As banks start to migrate operations over to the new platform one service at a time, they will gain confidence in using the new system and be motivated to continue migrating other services and operations until all services are running seamlessly on the new, modern platform.  

While this process will also take some time to complete, the flexible, modular structure of modern systems means that the bank does not need to put its development on hold and thus migration is more cost effective. Arguably, in the past, one of the key inhibitors of digital transformation in banking has been down to the lack of banking technology that allowed for a gradual migration. But now that modular core banking platforms are widely available, banks have a less risky, more accessible means of digitising their systems and aligning them with their customer needs of today and also of tomorrow.