Digital Transformation in Banks: A Tsunami of Change Coming towards Us

The current trend of digital transformation in banks is significantly changing the banks’ IT domain with far-reaching impact. Signs of the coming-up wave of transformation are clearly visible, while the analysis of the future needs show why these fundamental changes simply cannot be avoided 

There is probably not a single financial institution not being busy currently with digitalization: highly automated processes need to be implemented, the client management and relationship improved, new regulatory requirements integrated and cybersecurity significantly increased. These are only a few of the challenges which are creating headaches for COO’s, CPO’s, CIO’s and Product Managers.

This does not mean, though, that banks are adapting rapidly enough to the changes, nor is there an overwhelming belief that the changes can generate additional monetization to offset the investments in new technologies.

Flashback to 2005

In many ways, today’s challenges are reminding us of the problems from around 15 years ago, when many banks were either running on their own legacy systems or on outdated core banking platforms of third-party providers: neither the solutions nor the vendors were able to react fast enough to regulatory changes or new flexible product requirements. As a result, banks have developed a good amount of dissatisfaction over the years. «The architecture and the applications are not suited for the future». That was the main message shortly after the turn of the millennium.

Can Old Software Learn New Tricks?
Today, again, bank managers and board members are seriously doubting whether the current systems, developed mostly in the last century, can fulfill future requirements. Additionally, the vast amount of active applications and interfaces significantly increases the complexity and maintenance of the systems, when exactly the opposite is needed. 

Moreover, nowadays banks are facing other disruptive factors: movers and shakers like Revolut, N26, Apple, Amazon, Google, and Walmart are demanding a piece of the global financial market cake. Aiming for specific niches like online payments, business rules, and robo-advisers, they are basically trying to win new clients with attractive front-end solutions, “best user experience” and lower costs. As a result, this is increasing the pressure on the existing traditional banks to reach the level of their new competitors in a timely manner. The majority of banks are aware of the situation and willing to react. Unfortunately, the limited capacity of the IT vendors and the high cost of the solutions they offer will make it impossible for many financial institutions to confront the competitors promptly and comprehensively. In other words, their hands are tied and the initiative to act is clearly with their rivals, who dispose of relevant tools, quickly adapt to their clients’ needs and present a fast time-to-market delivery of new products. Established banks don’t really have another choice other than to ask themselves how to prepare for the future so they can stay successful and survive in an ever-changing market.

Are Bank’s Facing Extinction?

Banks’ ability to react within weeks or even days to their clients’ new requirements for new products and services are a matter of survival. A bank’s technology unit should never be the bottleneck on the way to success. They must find and implement solutions allowing them to be fast and agile in a clearly more complex world.

I hear a lot of people saying that all products should be standardized first. In some cases, this argument can make sense, at least when the client is not affected by this. But overall, our world is pointing exactly in the other direction as the overwhelming majority of clients are asking for more and more adaptation to their very specific needs. In the area of asset management, for example, some clients will not purchase shares of companies manufacturing weapons or producing oil. Taking these clients seriously means that we need systems that can deal with the automated processing of these specific expectations in a fast and simple way – a requirement that can currently not be fulfilled by most banking systems.

In addition, banks demand that their IT infrastructure and systems reduce costs. Challengers provoke price wars which shrink the profit margins of banks even further. To survive, therefore, in a time of ever-increasing price competition, retail, private or investment banks are forced to implement a leaner cost base. The competition works with higher volumes but at the same time at a significantly lower cost.

So, what do banks need to do to meet the challenges of the 3rd decade?

  • Face the wave of changes flooding the IT domain of financial institutions and its great impact on their profitability and make significant adjustments, accordingly
  • Adopt IT solutions that enable ultimate flexibility
  • React to changing individual needs with smooth automated processes
  • Implement uncompromising data security solutions
  • Avoid the depreciation of the existing system and the high cost of a migration
  • Realize that the success stories of bank’s disruptors are right around the corner
  • Adapt rapidly to changes, become much more flexible and create new values for their clients

There is so much more to digital transformation than you might think

The first step of digital transformation usually includes transitioning from offline procedures to online ones; however, digital transformation is about so much more than that: it is about revolutionizing the way we address our customers’ needs by using tools that were not available to us just a few years ago.

Let’s take, for example, a digital transformation of an insurance company. Sure, it is a whole lot more comfortable to fill in an online form for an insurance claim than to print it, fill it in manually, and email (or, god forbid, fax) it, but if the form is still processed manually, and it takes weeks to get the refund, the customer is still frustrated. If the whole procedure is done automatically and the customer gets paid within seconds or minutes, well – that’s a different game.

Digital procedures, therefore, should not be the digital mirror of the old offline ones. As part of the transformation process, companies should go back to discovery mode, dig into their customers’ needs and explore new ways of addressing them. After doing so, they should design an optimal digital solution that fits their customers TODAY. The original offline procedure was designed within the limitations of the offline domain. The online domain has a lot more to offer. By engaging this way of thinking and obtaining this methodology, we are to compose much better solutions.

Researching the customers’ needs may lead to finding new customer values that we were not able to deliver in the offline era. An insurance company can offer temporary car insurance for young drivers for a specific weekend or different pricing based on parameters that were not measurable in the past, such as mileage. Health care providers can offer online consultation with doctors when the clinic is closed, etc.

Using an iterative process that puts the customer at the center, companies can build digital products that not only reduce costs and increase customer satisfaction by simplifying the customer’s journey, but continuously introduce new values that keep their customers satisfied, engaged, and curious about what comes next.

4 Customer-focused Digital Transformation Challenges

Traditional companies that go through digital transformation build digital products to provide value to their customers. Since such companies are not used to building digital products, this transformation is far from trivial. Following are the main challenges they must overcome to be successful in the digital world.  

Finding Product Market fit

Transforming companies decided to go digital because their market is changing. Furthermore, moving to digital opens opportunities for new customer values they can provide as well as innovative business models they can use.

This means that transforming companies need to find their Product Market fit in the digital world. Having found product market fit long time ago in their traditional business, these companies are focused on optimizing their established products, which is by nature a more structured, performance-driven work. Now, they need to go back to exploration, which requires different skills and culture that encourages innovation and tolerates failure. 

Shortening Time-to-Market

In the fast-changing digital world, product updates must get to the market frequently to get feedback and adapt quickly to the market needs. While this is natural for digital companies, transforming companies need to learn how to achieve short time to market to keep up

Continuously adding customer value

Digital products are not finished once they are launched. New features are added, workflows and user experience are improved to answer the changing market needs. Features that users found exceptionally delighting in the past become standard and a good user experience may be considered annoying when other products introduce new user experiences.

Transforming companies are used to develop technology as a time bound project that ends upon delivery. In the digital world, they must learn to deliver growing customer value via continuously improving digital products.

Adopting new product methodologies

The methods that worked well in the past do not enable staying competitive in the digital world. Building successful digital products requires changing the way the company works and adopting new infrastructure, processes and methodologies. 

TL;DR

To transform successfully to the digital world, traditional companies must develop modern Product Management skills to find a new product-market fit, get faster to the market to validate it and continuously generate more customer value.

StarVision utilizes its product management expertise to help transforming companies overcome the customer-focused digital transformation challenges. Unlike strategic consulting firms that are focused on internal organizational changes, StarVision focuses on implementing the methodologies and processes that empower successful digital products.

What is Customer-Focused Digital Transformation?

The current era is characterized by a rapid transformation of traditional industries. In industries like banking, insurance and more, established companies are threatened by emerging digital players and are required to go through a digital transformation to stay relevant.

This transformation involves incorporation of digital technology into all parts of the company, resulting in a more efficient company that is better equipped to adjust to the new, fast changing world.

A key element in successful Digital Transformation is building digital products such as mobile apps and websites that provides value to their customer.  This is what we call “Customer-focused Digital Transformation”.

Building Digital Products

Building digital products requires deep understanding of the underlying customer problems and finding the best digital solutions for them. Since digital products are continuously evolving, it is an ongoing process – frequent launch of new versions and improvements based on market feedback.

Digital companies are designed to build digital products. Traditional companies need to develop modern Product Management skills in order to move from developing technology projects that ends when the project is shipped to focusing on customer value and building digital products that continuously improve it.

Generating new customer value

Digital transformation is much more than converting traditional products to a digital form. It opens a new world of opportunities to deliver higher value to customers.

To identify and provide the right value to the right customers, established companies must go back to discovery mode. In this mode, the Product team researches the market on an ongoing basis to find better solutions and use short, iterative development cycles to incorporate market feedback quickly and stay ahead of the curve.

Discovery mode goes beyond products and features. Digital products enable targeting different market segments and introducing new business models that may be more appealing to customer and increase the revenues for the company.

This is a cultural change that requires transforming companies to continually challenge the status quo, experiment, and get comfortable with failure. It is very difficult, if not impossible, to go through such a transformation without external help. However, companies that do succeed to make it do not only get to stay a player in their current market – they can develop to be a bigger player in a much bigger market.