Unquestionably, investing in digital

solutions is the right strategy for

banks, however most of them struggle

when it comes to embarking on such a

journey. 84% of companies fail at

digital transformation, according to

Michael Gale partner at Pulse Point.

But why is that and what are the root

causes, especially in the financial

sector?

Why Digital

Transformation is

a painful process

for banks?

Legacy and silo systems

One of the key difficulties which makes digital transformation quite cumbersome is legacy backend systems which companies like Apple, Google and Amazon don’t have to face. This allows them to deliver better customer experience than banks, and to keep up with the competition, these companies have to continuously refine the functions they offer, which is driven by the need to come up with solutions that meet the ever changing customer expectations. These legacy systems typically were designed 30+ years ago and even if there were some enhancements and upgrades, they still run on older programming languages like C and C++, which makes it extremely difficult for the banks that use them to keep up with the rapidly changing environment. Another unpleasant area that banks are facing is silo systems, which sometimes not only prevent the full overview of the customers, but also make valuable information invisible for decision makers. Spending on core banking platforms is still a critical investment for banks with over $ 22 billion in 2015 which is clearly indicated by the fact that banks in North America, Europe, Asia-Pacific and Latin America altogether spent $241bn on IT in 2016. Banks should follow the above approach and invest in a holistic IT transformation if they want to keep up with the competitions and be able to turn into an outside-in organization where the customer is in the focus. This certainly requires more than just a decision, since there are several risks, but ultimately installing a 24×7, real-time solution, based on open source technologies is indispensable to fulfill the above statement. This doesn’t mean that banks need to immediately plan for a rip and replace, but rather they should build a step by step, revolutionary IT strategy.

Leadership/Organization/Human factor Digital upgrade or transformation? These terms are often misused and it is important to clarify and separate them. Digital upgrade is utilizing digital technologies to better serve a particular group of people, whereas we talk about a digital transformation when digital technology is used to change the way the business operates. Digital transformation processes are more likely to fail if the necessary support and the mindset are missing. These are key factors (and not only for digital transformation projects)! Change requests, escalations, unnecessary meetings. Sounds familiar, right? If relevant departments and teams are not involved from the very beginning of a project, even the simplest implementation can turn into a nightmare. Usually the management and leadership team is involved during the pre-sales or strategic phases and when it comes to implementation the teams are not necessarily clear on the objective and the scope of the project they undertake. Poor communication between IT and business teams also impacts the success of a project. Ideally, information and the vision are shared across teams and the goals are clear for everyone, therefore the leadership team should make sure that information is cascaded. If the current environment doesn’t support innovation adequately, a good solution can be a spin-off bank which is the creation of an independent bank through the sale or distribution of new shares of an existing business or division of the parent bank. Bigger banks can outsource more solutions or even whole departments (e.g. retail) to the market, while smaller institutions could only push out functions like biometrics authorization, etc. The point in both cases is that the spin-off organization can work independently, free from limitations, stereotypes, and old habits, which may hinder the digital transformation in the industry.

The Commonwealth Bank’s core banking modernization program

helped to modernize its existing banking legacy systems with a

customer centric platform that enhances the way that the Group

provides services to its customers and the way it does business, but

according to Pete Steel, Executive General Manager for Digital, there

is still more to do: “We have the appetite to do even more in CBA,

because we recognize technology and digital are really going to be the

dominant force over the next 10 years,”

What else is needed?

There are some good examples how pain points can be

solved, but is it enough to address these only to achieve

the desired success and result? Certainly not. Since digital

transformations are quite deep changes and will likely

change the way banks operate today, new tasks and

entirely new competencies need to be created.

The Digital Strategy Journey

When it comes to digital, customers like to play,

keep things simple and expect a personalized,

omni-channel experience from their finances.

Therefore banks have to deliver an engaging

solution which is competitive with Google,

Facebook or Apple.

These companies are successful, because they

are focusing on the user. They provide them with

superior user experience and once the users are

hooked, valuable information will be gathered

about them. Then this information will be

carefully analyzed and will be used to sell the

most relevant products and services.

The same can be achieved by banks, but they

need to have a strategy, a journey which can be

followed, polished and continuously improved

and it all should start with a customer centric

mindset.

Data, data, data As previously mentioned, data is fundamental in order to provide customer-centric, personalized experience. So once the customers are engaged and they are provided with the desired UX, the next step is to collect their financial habits to serve them better. KYC is a familiar term when it comes to identifying and verifying the identity of the clients and also refers to the bank regulation which governs these activities, though in a digital bank it can mean a lot more. Imagine when you are able to set up a mortgage loan campaign to those customers who have spent between 1000 – 1500 USD in a month on rent, between 30-40 years old and their annual income is between 130.000 – 180.000 USD a year. All this information – and much more – can be gathered through the digital channels introducing tools like personal financial management (PFM), which enables clients to categorize transactions, set up budgets and saving goals and even provide predictive analysis. These tools not only can educate the customers and make them financially more mindful, but also enable the bank to gather these valuable data and use it to create an extremely precise user profile which can be used for specific and more importantly relevant cross sell and upsell opportunities. PFM tools earlier were not that popular, but these days the adoption rate is higher than ever. A study by Accenture shows that 67% of millennials in North America are interested in their bank providing tools and services which help them create and monitor a budget.

Follow-up and innovate A fundamental concept in business is to always be able to be better and better. Banks should do the same. Introducing something new is more or less compulsory, but to make it better and to evolve it is also - if not more - important. Continuous innovation should be part of a good strategy and banks have to keep up with the market and the new requirements from the customers. They don’t necessarily have to be frontiers like Google, Apple and the rest who are specialized in UI/UX, but they should be able to adapt and respond quickly to the changes.

Some areas of digital banking innovations are

going to be extremely interesting for the coming

years.

AI and Robo advisory Artificial Intelligence (AI) is based on the assumption that the process of human thought can be mechanized and makes machines act more intelligently. AI might seem like science fiction, something that will be around in the distant future, but actually it has a very long history and it also affects our everyday life in the present and it’s evolving rapidly. Examples like Siri, Cortana, Tesla, Google Now, and Boston Dynamics were designed to perform specific, cognitive tasks to support human intelligence and clearly industrial growth also. They analyze, compute, solve problems, take actions and learn with the speed and accuracy that goes far beyond the human senses. This technology is already available and used in banking in areas such as risk management or trading. But exposing it to bank customers can open a whole new world which can be beneficiary both for the bank and the customers. For retail customers, AI and robo advisory is mainly relevant through digital channels e.g. mobile and online banking. Undoubtedly, it can increase customer experience with personalized services, products and offers while it can also favor the bank when customers are loyal and more revenue is generated. On 24/10/2016 at Mobile 2020 in Las Vegas, BofA announced Erica, an AI-powered virtual assistant bot to provide better customer experience for their customers. It will be available next year inside the bank’s mobile app and it will use artificial intelligence, predictive analytics and cognitive messaging to help customers make payments, check balances. She will continuously analyze the financial status of the customers and offer them the most relevant services and products. From Erica, BofA hopes to extend some of the benefits of the one-to-one personal service, to advice users and to improve customer experience.

According to a digital banking

survey from Accenture 46%

of consumers are willing to

bank using robo-advice in the

future.

Open Banking Ecosystem – The Future? In 2015 The Open Banking Working Group (OBWG) in the UK was set up to explore how data can be used to help to improve people’s banking experience and to encourage innovation and boost competition in the sector. The revised Payment Services Directive (PDS2) was approved in 2015 by the European Parliament. One of its main changes is the opening the EU payment market for companies offering consumer or business-oriented payment services based on the access to information about the payment account – the so called "payment initiation services providers" and "account information services providers". Open APIs enable developers to build applications and services around the financial institution to help banks, customers and regulators to provide better experience and to take banking into the 21st-century. For customers, having access to their own banking data will mean better options for choosing and using financial products, and better ways to manage their finances. For challengers in industry, having access to open bank data, and clear, secure ways to integrate it with shared customer data, will mean they can quickly develop new, or better, products and services. For banks, being able to make their interactions with customers smoother and simpler will help them to find efficiencies, improve customer service and deepen their customer base. In November 2016 Citigroup has made some of its application program interfaces available, so third-party developers can deliver cutting edge solutions.

Incubations, innovation labs, CoEs More and more banks and even governments are setting up innovation labs or Centers of Excellences to be thought leaders and to encourage the financial market to join in, invest and be part of the innovation. Clearly these are excellent initiatives which will result in a healthy competition which can speed up the innovation in the financial industry. Two excellent examples show the demand

for these innovation labs. enables a

strategic UBS is focusing on wealth

management and thinks that innovation

ecosystem enables a strategic

orchestration of new technologies and

innovation for their wealth management

client, while Hong Kong Science and

Technology Parks Corporation (HKSTP)

encouraging tech startups and companies

to be part of the Science Park “that houses

some of the world’s most advanced

laboratories and R&D offices”.

Fabian Szijarto

Solution Consultant, Retail Banking, APAC

fabian.szijarto@misys.com

Banks must respond to

these challenges and

adopt a customer centric

mindset as a priority,

since disruptive players

like Facebook, which

recently announced that

it promotes P2P

payments are entering the

financial market and may

have a competitive edge.