A WEALTH OF DATA: WHAT WILL CLOSE THE GAP BETWEEN CHALLENGER AND TRADITIONAL BANKS?

It’s well-known that the pandemic accelerated digital adoption in many sectors, including financial services – but our research reveals just how quickly banks rose to the challenge. As many as 93 per cent of traditional banks, and 87 per cent of challengers, rolled out new technologies so quickly they are now five years ahead in terms of digitalisation compared to where they planned to be. 

During that turbulent time, tools for self-service and automation became a necessity, rather than an optional extra for more digital-savvy customers. 

People went cashless almost overnight, branches were closed for all but the most essential services, and customer support teams found themselves working from home while dealing with an influx of enquiries. Never had there been a more compelling argument for tools like chatbots, powered by conversational artificial intelligence (AI) to answer common questions, so that staff could concentrate on the more complex cases requiring greater sensitivity. 

Digital self-service tools enabled banks to not only maintain the same level of service in challenging times but enhance it, bringing it into line with customer expectations, which had also shifted as a result of the pandemic. 

Again, it’s no surprise that 97 per cent of our survey respondents, who were all senior IT decision makers from both traditional and challenger banks, agreed that the crisis led to more people accessing banking and other services online. Even once banks and other businesses started to reopen people didn’t want to wait in long queues to speak to someone on the phone, or visit a branch for straightforward questions. 

Banks benefited from the operational efficiencies that technology brings too. It enabled them to scale up support as demand surged, so that enquiries could be resolved in a timely manner without requiring additional staffing resources. 

No wonder then that our findings suggest 84 per cent of traditional banks wouldn’t go back to old processes once the pandemic subsided. And while the number of branches has been declining steadily since 2015, there was a noticeably sharper drop from 6,030 in 2021 to 4.949 – a clear indicator of the acceleration in the shift from in-person to digital services. 

So fast has the transition to digital been that 87 per cent of our respondents also agree that traditional banks are now far more competitive than they were before Covid. As they continue to develop more digital tools, it may seem as though the gap between them and the challengers is closing, at least from the customer’s perspective. 

Not there yet

But scratch the surface and you’ll find that although the bigger banks are starting to look and act more like digital leaders, many still rely on an inefficient mix of manual and automated processes. They might have deployed new tools during the pandemic but unless they accelerate adoption of technologies such as cloud and AI, they won’t see the full value from their investment. 

Legacy technology stacks have already made it difficult to innovate at the same pace as the challengers – for example, the challengers were first with services that allowed people to save by automatically rounding up purchases and transferring the extra cash into a savings account. Customers of traditional banks, on the other hand, had to bank in a more manual way. 

They need to get the basics right too. It’s one thing to encourage people to bank online rather than in branches but this soon falls down if your app is prone to crashing leaving customers unable to access their account. The problem is that even if services appear slick from the outside, they can be resource-intensive and costly for banks to deliver.

Our research suggests there are a number of barriers to cloud adoption for all banks – including security and compliance, which is understandable given that they’re dealing with huge volumes of sensitive data in a highly regulated environment. 

A particular challenge for traditional banks is legacy system integration, which was cited as a barrier to cloud adoption by nearly 87 per cent of respondents. 

This isn’t a problem for newer digital-first banks. As the authors of this Deloitte report on the DNA of Digital Challenger banks note, ‘they rapidly … matured in a world where ecosystems and partnership are the norm, not the exception’ and are used to integrating ‘banking as a service’ platforms and APIs within their technology stacks. 

The emphasis on partnerships is something that traditional banks should look to emulate. No organisation has the capabilities to achieve true cloud adoption in-house. Instead, they need to lean on technology partners who understand the challenges and opportunities within financial services, and who’ve helped similar-sized firms execute programmes successfully. Above all, their partners should understand that cloud adoption isn’t just a technology project but one that involves a fundamental change in culture and mindset.

From digitisation to digitalisation

For a long time, banks have concentrated on digitisation – simply moving processes, like filling in forms, from branches to online. Existing products and services are delivered via digital channels, and legacy processes automated, but manual input is still required from both staff and customers, which reduces efficiency. 

Digitalisation, or digital transformation, completely reimagines how financial products are developed and delivered, leveraging rich seams of data to deliver intelligent, contextual services to intimately understand customers and treat them as individuals. 

Almost two-thirds of challengers see being data-driven as a competitive advantage, compared to only a third of traditional banks. 

As mentioned earlier, the young challenger banks don’t have to shoehorn applications into legacy systems. They’re built on data, and view technology as an enabler for frictionless and personalised customer experiences. In fact, 65 per cent see it as a key differentiator, compared to 53 per cent of traditional banks.

As well as customer experience, regulatory compliance and risk remains high on the agenda for the banks we surveyed. Three-quarters (74 per cent) said that regulatory compliance processes, such as stress testing, will play an important role in supporting the core banking system in the next three years. In fact, such is the concern around regulatory compliance, 45 per cent of banks labelled ‘meeting regulations’ as a key challenge to implementing IT.

Their other top priorities for the coming three to five years include fraud monitoring and investigations (66 per cent), risk governance (47 per cent) and collections/debt management (39 per cent). The challenge, of course, is identifying anomalies and risks quickly when you have large amounts of often-siloed data. Yet by applying AI and machine learning (ML) techniques they can improve both efficiency and accuracy, and unlock more value from their data.

Digitalisation can feel like a big leap for traditional banks because it means redesigning processes, reimagining business models, and rethinking customer engagement. However, it’s important to remember there is a growing number of analytics tools now available to banks as well as low code / no code solutions that democratise use of analytics, increasing agility and lowering the barrier to entry for innovation. So the transition isn’t as daunting or disruptive as some might expect and the vast majority of respondents (83 per cent) from both types of bank expect to make significant investments in data analytics over the coming three to five years.

Final thoughts

Banks demonstrated how quickly they could accelerate digital adoption during the pandemic, and they’ll need to continue on this trajectory if they’re to deliver on their goals. 

The first step is to move from digitisation towards digitalisation, and lean on technology partners to lay the groundwork for rapid innovation. In some ways, traditional banks are at an advantage compared to the challengers – they have deeper resources and a wealth of data to develop new and attractive products and services for customers compared to some of the challengers – and they need to capitalise on these advantages.

What’s critical is that they use cloud-based advanced analytics, including AI and ML, to deliver these services entirely online in a simple, personalised and seamless way, without directing customers to helplines and branches to complete an action. Just as important is using these capabilities to iron out inefficiencies in their technology and back-office processes to make sure new services are both scalable and profitable. Because ultimately, this is what will help narrow the innovation gap between the traditional banks and the challengers.

Download the full research Banking on technology: How rapid technology adoption could create a fairer, simpler and more compliant banking landscape. Further details are available here.