How digital transformation can revolutionise banking in the post-pandemic world

In this digital era, the banking industry is undergoing fundamental but revolutionary changes brought about by the advancements in technology.

For example, many banks in favour of digital transformation have adopted the Open X ecosystem which fosters a banking environment with seamless data-sharing, integrated marketplace, easy access to comprehensive collaborations, improved customer experience, and advanced product innovation.

With better specialisation and the entrance of big techs into the scene, Open X ecosystem may become one of the top ten trends in retail banking to watch out for in 2020 and beyond.

There are other changes to the banking system as well.

Banks have begun collaborating with the Fin-techs to explore point-of-sale financing, i.e., credit support at buying points like auto-mobile stores or other places the customers may require.

They are also beginning to explore typically unsecured consumer lending through digital channels, Block-chain solutions can improve KYC and identity management programs as well.

Banks are also embracing design thinking. They are using AI to create a seamless customer experience. At the same time, collaboration with Reg-techs continues to rise and technological innovation is at the driving seat of the banks' risk compliance initiatives.

Digital technology investments in financial organisations are mostly going to mobile technologies. At the same time, the importance of mobile banking channels for a better customer experience has increased many-fold.

These trends exhibiting digital transformation in banking can be attributable to the rise of artificial intelligence (AI), machine learning (ML), blockchain and other cutting-edge technologies, as well as changing customer expectations.

Hence, most successful retail banks are pursuing digital transformation along with advanced innovation that induces a higher level of profitability.

And the gap in success between the banks that embraced digital transformation and those lagging are starting to appear in new customer acquisition results, efficiency ratios, customer satisfaction, and overall digital maturity.

That is because, most financial institutions prioritised an improved customer experience while, in actuality, many still were focused more on cost containment, continuing a trend that had been in place for several years.

But digital banking leaders eventually realised the importance of real-time advice, the merits of open banking as well as restructuring delivery networks to favour digital over physical.

It should be mentioned that leadership and experience may be crucial in implementing this transformation. At the same time, any transformation should consider the financial strength (or weaknesses) of the industry before making large, overarching changes to long-held operating norms in banking.

Studies suggest that there are certain tips to successfully transform the banking system: viewing the digital transformation process as overarching, creating new business processes and integrating new technologies from the inside out.

The aforementioned processes require tech-savvy leaders who are willing to and able to lead an entire organisation in the digital transformation process as well as build the workforce of the future.

These leaders would provide the foundation for education and hiring, focus on the speed of delivery, personalisation and customer engagement, support a culture of innovation and encourage the building of new business models.

But the expectations from AI in Banking varied greatly from reality

While there is no question that using data analytic and AI benefits the consumer, in the vast majority of cases, deployment strategies taken by legacy organisations continue to focus on cost reduction and productivity and/or risk management.

In the global context, it became clear that the deployment of AI for the benefit of the consumer has lagged the hype by a significant amount.

On top of that the gap between digital skills affected the success rate in digital banking transformation. Talent shortages might be a threat to the growth prospects of banks and effective innovation required to provide a pleasant customer experience.

Pandemic and digital transformation

The Covid-19 pandemic also adversely affected the banking system and digital transformation may be the way for recovery.

During the pandemic, the gap between progressive legacy banking firms and fin-tech offerings narrowed as consumer digital expectations escalated.

Coming out of this crisis, there will be much more clarity as to which organisations are embracing the digital transformation process and which firms will continue to 'fake digital' – only making iterative changes to respond to short-term needs.

Consumer banking and payment behaviour has changed dramatically. As many consumers were forced to work from home, financial institutions limited access to lobbies and people continued to be worried about everything touched by others, financial institutions realised that digital banking would move beyond younger demographic segments to become the standard method of financial services engagement for all.

Even when the pandemic subsides, most financial institutions have realised that just because consumers may be able to visit branches doesn't mean they will.

It also became clearer that going back to using cash, checks or point-of-sale systems requiring tactile engagement may not ever return to what it was pre-pandemic.

So, how should we pursue digital transformation with the backdrop of the pandemic?

The Covid-19 pandemic heightened the urgency for all financial institutions to reassess their existing business models, core systems structure, distribution networks, commitment to innovation and product assortment for a new reality of consumers expecting simplified digital solutions.

The new banking model must also reflect more agile and aggressive competition and shareholders expecting greater efficiencies. In banking, the efficiency provided by a platform-based model may also be significant.

A major concern for the banking industry is that it continued to lag most other sectors in the use of data and advanced analytic in marketing. Unfortunately, except for the largest institutions, confidence in the ability to leverage AI tools also decreased.

Organisations committing resources to improve their application of data and insights for improved marketing will be in a stronger position going forward. They will be ahead of other financial institutions in addressing both immediate challenges caused by the pandemic as well as being able to take advantage of opportunities going forward.

Opportunities in digital banking transformation

Done well, digital transformation provides immense opportunities for increased internal efficiencies and improved marketplace competitiveness.

But, the challenge is that the process of digital banking transformation touches many areas of the organisation, requiring prioritisation of investments. The process also requires ongoing engagement and potential reorganisation, because there is no static endpoint.

Becoming a digital banking champion in a post-pandemic future requires more than advanced technology and a cool digital application. The goal is to create an organisation that outperforms peers in market value, revenue growth, efficiency (cost ratios), customer satisfaction and even the ability to find and keep talent.

The experiences (both digital and traditional) will need to be supported by data, advanced analytic and an overarching institutional focus on building solutions from the inside-out, with the customer being at the centre of the development process.

Different research suggests that banks and fin-techs need to prepare themselves for a more radical change than many previously anticipated. The collaboration will be the foundation of the future of financial services.

In the era of Open X, ecosystem players will have to work together more effectively than they have previously. Only by embracing collaboration and new, specialist roles can both banks and finTechs thrive and best serve their customers.

It's clear that many barriers to collaboration still exist, and there is an urgent need to overcome them for collective benefit.

Md Kafi Khan is the company secretary of City Bank Limited

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.