Digital Banking Transformation: A How To Guide

The next 20 years will see the world go from 20,000 “analog” banks to no more than several dozen “digital” institutions.

                                                                -Francisco González, BBVA Chairman

These days, “digital transformation” tops the list of mission-critical issues for banks. Most have been on this journey for years now, but are only halfway there and struggling. This is unsurprising given the breakneck pace of emerging trends such as Internet of Things, mobile ubiquity and wearables, combining to create a new and unfamiliar set of customer behaviors and expectations. 

To keep up in this ultra-dynamic market, traditional banks need to adapt or reinvent their operational models. As Standard Chartered CEO Peter Sands put it: “Banks have invested huge sums in technology – automating processes and enabling customers to bank online – but we have not yet seen the fundamental transformation of business models that have taken place in other sectors, such as music". 

Today’s financial consumer standards are set by on-demand cloud services such as Spotify and Netflix – not by other banks. This is particularly true for younger generations, fondly (or not!) referred to as “Millennials.” As one bank executive observed at the Bank Governance and Leadership Network (BGLN) conference in New York: “Millennials don’t bank… This is not just a technology question; this is about a cultural shift.”

So how should banks meet this imperative head on? What strategies should they adopt in transforming their digital banking propositions to meet evolving customer needs and expectations?

In an attempt to answer these pressing questions, we’ve put together this handy guide.

Happy transforming!

1. Become Customer-Centric (for real)

Banking in the digital age requires a drastic, profound reset of how banks react to changing customer needs and expectations – not just in words, but in deeds! Instead of working “inside out”, banks must adopt an “outside in” approach where existing business models are rethought & acted upon. The starting point should entail moving to where customer is, not trying in vain to drag them to the branch.

In their joint research, A.T. Kearney Analysis and Efma identified that bank executives define customer centricity based on 3 indicators:

• Proximity & anticipation of customer expectations: This requires a change in mindset and practices, resulting in customers’ becoming the center of the bank. Some key practices include monitoring social networks, engaging with clients there, and using those channels to develop concept spaces—new offers and services, CEO discussions, or closer client interactions—where banks can get a more realistic sense of actual customer behavior.
• IT responsiveness: An enhanced customer experience will go a long way, so a bank’s technology must be leading-edge and responsive. In digital, the bank’s IT is naked in front of the customer. The ability to capture the full potential of new technologies starts with an agile IT organization and cross-functional teams that can soak up customer desires like a sponge, and craft the corresponding products & services.
• Rethought branches: What does the physical branch of the digital future look like? In the ideal scenario, banks have flagship shops that beautifully and intelligently showcase their customer-focused retail brand and strive to offer face-to-face advisory services in a warm, welcoming way.

2. Make Flexibility Part of Your DNA

The market is moving so quickly that it’s impossible to predict what will customers want in 10 years. Flexibility must therefore become a dominant gene in banks' DNA. Moreover, 10 years is a laughable timescale in this brave new world - the time-to-market of new financial products, services and upgrades should be in the range of 6 months or less (A.T. Kearney Analysis & Efma, 2014). Many leading global banks including Deutsche Bank, Bank of America, Barclays, UBS, BNP Paribas and BBVA tackle this need for speed by forming strategic partnerships with nimbler providers of white-label FinTech solutions. 

Another major roadblock hindering banks from building technological flexibility is their existing legacy systems, which are often jokingly described as “spaghetti” – a mess of loosely integrated networks, many of which still require manual interventions or are older than the Internet itself. Without addressing this issue, banks don’t stand a chance in becoming as agile as they need to.

3. Personalize Customer Care

Historically, banks have done very little to tailor their products. Today, customers expect digital services that are not only faster, but also personalized. They want their desired channel, anytime, anywhere (recently coined “opti-channel” by Jim Marous of The Financial Brand).  

Good news for banks (for once): it’s actually easier to differentiate the experience for different segments digitally than physically (BGLN, 2014). For example, LaCaixa in Spain has adopted “ubiquity” as its digital banking strategy to differentiate its services and to enhance digital relationships with customers. The strategy is based on the following 3 pillars:

• When (everywhere)
• Where (always)
• How (improving digital banking functions in a disruptive way)

Simple, a pure digital banking player, differentiates its offers by making its technology and service 100% human and personal. They put much more emphasis upon customer care rather than “selling products”, and the majority of new product ideas come from interactions with customers, creating a very positive feedback loop.

Other banks are identifying ways to play a larger role in customers’ transactions by providing contextual offers and advice. Still others deploy digital money management tools as a strategy to increase customer satisfaction, improve loyalty and retention.

4. Prioritize Segmented Mobile

Mobile has become the epicenter of digital banking. The Economist estimates that more than half of mobile devices sold today are smartphones, and more than 80% will be by 2020. They have become the fastest-selling gadgets in history, outselling PCs 4 to 1.

85% percent of the bank executives surveyed by AT Kearney & Efma said that mobile is the cornerstone of their digital strategy, as it becomes most customers’ first touch point. However, most banks have put their mobile banking strategies and customer journey through a “one-size-fits-all” approach focusing on features and offerings, ignoring the needs of individual user groups which vary across age and income. This tendency calls for a segmented approach, which entails developing needs-based features and offerings for a much more “adoptable” mobile offering.

5. Promote Open Innovation & Experimentation

Cultural legacies and pressure from regulation have caused banks to become conservative and slow to innovate. According to one bank’s executive (BGLN, 2014): “This is a real threat… Right now there are some geniuses in Silicon Valley sitting around thinking about how to beat us – and we’re not thinking about how to beat them. The issues are not technical as much as they are organizational. We are talking about organizations that are incredibly resistant to change… Boards should be focusing on how to make the organization more responsive, nimble, and customer-driven. They should be encouraging management to test, innovate, partner, and explore.”

Open innovation ecosystems are the cradle of design and delivery in the digital era. Leading in digital requires, as one banking leader in Europe noted, “a highly efficient connection between new technology releases and partners.” Brazil’s largest bank, Bradesco Financiamentos, is addressing this issue by making its APIs available to FinTech start-ups and encouraging them to develop and experiment various solutions for the bank. BBVA is following suit by promoting similar partnerships and acquisitions. Others, such as UBS and La Caixa, are organizing innovation challenges and hackathons to find and partner with creative startups and entrepreneurs. 

6. Get Strategic With Analytics

The management, utilization and monetization of data will play a key role in the digital shift. Many banks look to big data as the silver bullet in profiting from the massive amounts of information they hold on their customers. These insights help banks to provide personalized recommendations and more contextual advice. However, most banks use data operationally, not strategically. 3 areas should be addressed to reverse this:

• Integrate different sources of data – Banks use transactional data as their main data source, which is a good starting point. However, this data fails to present the full picture of their customer's financial life. Most of us bank with several financial institutions. A 2013 Gartner study indicated that in Western countries more than 75% of people have accounts with 3 or more financial providers. Given this reality, banks should allow clients to incorporate data from multiple providers by offering account aggregation. When asked if they would like to see all of their financial accounts in one place, nearly half (46%) of all customers agreed that this was of interest. To make transactional data even more valuable it should be integrated with contextual data, which means the data available in social media and other online sources. Additionally, mobile can help banks understand how people are interacting with each other behind the transaction.

• Improve customer service without violating privacy concerns – Does the previous point raise some red flags? It should! The question of how far banks should go in mining customer data is an extremely sensitive one. Banks must ensure that customers see the use of their data as valuable and that their privacy has not been violated. It is clear that customers believe that banks shouldn’t use their data for advertising, for example. It should be used to help customers to improve their financial behavior and well-being. This requires a careful approach in presenting data and offers to the customer.  Brazil’s Bradesco Financiamentos managed to build such a strong relationship with their customers that they themselves asked the bank to use their personal information in designing personalized offers. They even encouraged the bank to check their social media likes to provide them with the most relevant offers.

• Invest in the capability to use the data effectively – Banks have a unique view of their customers and yet many lack the analytics capabilities to turn this into a competitive advantage. Banks need to invest in both the required technologies and people (data scientists) to make the digital transformation a reality.

7. Embrace The Cultural Shift

One of the most important—and perhaps most difficult—change ahead for traditional banks is a mindset change. The digital age is fundamentally impacting organizational culture as it forces banks to shift from a product-centric to client-centric point of view; from planning cycles to “test- and-learn”; and from silos to inclusiveness (A.T. Kearney Analysis & EFMA, 2014).

The bank executives surveyed by A.T. Kearney & Efma highlight 3 cultural attributes that are vital to a successful digital transformation:

• Forward thinking – Training and communication must involve everyone in the bank, including departments not directly impacted by digital. Participants are focusing on providing clear, action-oriented content such as ready-to-launch services and new technology uses. Some banks are appointing “digital communication ambassadors” to usher in the new culture.

• Empirical approach – Leading banks are developing the “test-and-learn” approach, with some asking employees to practice digital products at work during business hours to fully understand them and be fully aware of what is happening in digital.

• Openness – Employees should be curious about new digital practices, new services, and technologies. For leaders, this means accepting errors from the test-and-learn process, and collecting and frequently sharing feedback among teams, clients, and partners.

At the center of the leading digital transformations are the banks’ leaders—specifically CEOs—who must become Chief Cultural Transformation Officers. To lead the bank to this new digital-focused culture, leaders will have to initiate and lead the conversation about digital vision and increase the bank’s ambition.

Going Forward

Compared to the way digital disruption has transformed other sectors—such as music, entertainment, telecommunications and retail—it is clear
that retail banks have barely scratched the surface when it comes to the necessary speed and magnitude of change.

The biggest challenge for banks will be the adoption of “customer centricity” as their main strategy to meet evolving customer needs and expectations. Banks need a new set of competences enabling them to deliver on this strategy, only a handful of which have been outlined in this How-To series.

To recap:

• Forming strategic partnerships with a capable FinTech partners is one way to catalyze this process, enabling quick access to the latest digital banking solutions with minimal time-to-market lag.

• It is important that banks adopt a segmented approach toward mobile to ensure a seamless experience and to increase adoption. 

• Both transactional and contextual data need to be leveraged strategically to offer the most relevant products and services and to help customers to improve their financial well-being, while simultaneously generating new revenue streams for the bank itself.

Digital banking is not just about developing the next killer app. It’s about turning the traditional business model on its head and embracing disruption head on. Bank executives have a major role to play in this shift by fostering an organizational culture of openness and innovation and by encouraging customer-centricity across the board and beyond.