Digital Transformation- An Imperative Not a Prerogative
"The times they are changing". These are golden words from a song that Bob Dylan sang in 1960s. Incidentally, Bob Dylan, finally collected
his Nobel prize recently in 2017.
These words could not have been truer for Banking
industry in any other era. Sure, they have gone through their share of ups and
downs but they have never been challenged from as many quarters ever. The
industry has been protected by the regulators and by the size that these banks
have built. Now, the banks are challenged by companies having 20-25 employees
working out of a small office somewhere but reaching to millions of customers,
potentially, across the globe. These are new age FinTechs, financial services enabled
by technology.
This is primarily because there is a significant
difference in what the customers are demanding. Now, Customers want ease of use that
Google provides, convenience that Uber accords and personalization that Amazon
has brought. These are all examples from the new digital world. New era, new
paradigm. Darwinism was never so frequently used term in Banking.
Let us look at the key factors, which are affecting the
banking industry:
Rising competition- According to a survey conducted by
Capgemini and European Financial Management Association (EFMA)- more than 50%
globally are saying that they do business with at least one non-traditional financial
firm
Increasing customer expectation- I have already
explained this earlier with Google, Uber, Amazon Example.
Lower barriers to entry- Regulators themselves are asking
the banks to open up their system to allow newer players. Also there is no
dearth of funding for innovative FinTechs
Increasing regulatory requirements for disclosures and
risks
Rapid technology evolution- Artificial
Intelligence threatening to eat into all the advisory fees that banks get)-
these have left no option for a bank but to embrace digital transformation.
So, digital transformation is an imperative now and not
a prerogative any more.
Digital Transformation- Strategy and Execution
However, the question is how can the banks take up a
holistic digital transformation? A new paradigm shift requires re-imagining.
And re-imagining requires involvement of the top management right through the
strategy formulation to the effective execution.
Strategy
The new order of business is due to the fast changing
customer behavior. A significant portion of the strategy formulation has to
focus on what the customer needs and wants are now and how will the needs and
wants evolve in due course of time. Big data and prescriptive analytics can
surely help and banks have a treasure trove of data that they can use.
Next key thing is culture. Culture could be the key
culprit and that has to be kept in mind. A phrase originated by management guru
Peter Drucker and made popular by Mark Fields, President and CEO of Ford
Motors, serves an ominous warning; that phrase is- Organizational culture eats
strategy for breakfast and dinner. Banks should pragmatically examine what it
would take to prepare employees and the systems within, to transform digitally.
Change management has to be planned in advance.
Next we come to execution.
Execution
“Absence of proper execution is the single biggest
obstacle to success and the cause of most of the disappointments that are
mistakenly attributed to other causes.” These are the words from revolutionary
book- Execution The discipline of getting things done- by Larry Bossidy, former
ceo of Allied Signals and Management guru Ram Charan. The caution is foretold.
As we had done with Strategy, the execution starts with
getting the customer focus right. After Customer and market segmentation, each
customer in the strategically selected market and customer segment, becomes
important. And the focus should be on giving the best experience to the
customer in each of his or her journey with the bank. A particular attention
should be given to the moment of truth.
Customer
Journey
The front office, middle office and back office should
function seamlessly. Let us take a simple example of a customer journey with a
loan product. For simplicity, let us start with the customer applying for the
loan. The customer should have all the basic information available to him like
what is the loan amount that he can expect to get, what is the interest rate
that he will be charged etc. with a single click. Here the front office
handling the customer interaction works with the middle office to check the
credit and risk profile of the customer and gives a personalized loan solution
to the customer. Similarly, documentation should interact seamlessly with
middle office and front office. Approval needs back office and front office
coordination, so on and so forth. It is important that the client does not feel
the machinery. He or she should get the real time personalized interaction with
the bank. Period.
Moment
of Truth
Moment of truth gets the bank further closer to the
customer. This is creating that wow moment that makes a loyal customer,
potentially for life. As mentioned in the article, instant approval of loan
when a person needs to pay immediately for a specific need can create a loyal
customer.
Next step in execution is embedding the culture of
innovation within the organization. Compared to other industries, which are not
encumbered by regulatory fences, banks have lacked a culture of innovation. A
risk-averse approach to innovation is creating incremental improvements rather
than the level of innovation needed to generate meaningful ROI. There should be
incentives for adopting new methods of improvement. A culture of experimenting
and learning should be inculcated.
Many of the mid to senior level executives in the banks
are still not very familiar with the new digital paradigm. A bank should have
an aggressive plan for training, skills development and reorientation of
workforce.
Technology
Moving to technology- It is the key enabler and the
focus should be on making the architecture agile and flexible. With lifecycle of
technology becoming shorter by the day and availability of off the
self-products, the architecture should lend itself to easy updates,
enhancements and integration.
Digitize
and Automate- Within technology initiative, the first
step should be to digitize any portion of the banking that is not yet
digitized. Next step should be to automate. Within banking industry, there are
several use cases of processes being automated by combining robotic process
automation or RPA and smart automation with cognitive technologies by leveraging
natural language processing and machine learning capabilities). Examples of use
cases are:- automating administration of purchase orders and invoices, checking
for unusual patterns in transactions, checking for consistency of data (format,
quality, etc.).
Here, I would like to note that, artificial Intelligence
will change automation landscape in a much more holistic way once the
predictability of the technology reaches closer to 100%.
Digitization and
automation will result in efficiency and cost savings.
Integrate
Customer Experience- Next step is to integrate all the information
regarding customer and to make maximum use of the information available. The
problem is that banks rarely have a complete and common view of their customers
available to each of their consumer channels. In order to apply for a new
product or service, an existing customer has to go through a process of
providing the same information that the bank already has on files. Common view
from omnichannel should provide holistic data that can be used for providing
personalized services and products. Similarly, the digital campaign should be
integrated, e-products created, dynamic pricing provided and data analytics
institutionalized.
Benefits from integrated customer experience are upsell,
cross-sell, customer satisfaction and loyalty.
Manage
Enterprise Risk- While, the focus is on aligning with the
customers, enterprise risk management should be given adequate attention. With
advanced analytics and reporting it has become easier to manage operational,
credit and market risk but there is still a long way to go before the
underlying systems become efficient, integrated and algorithms are made
foolproof. Results from efficient enterprise
risk management are improved sustainability and regulatory compliance management
for a bank.
Collaborate,
Compete and Leverage- In an era where technology is changing very
fast and speed is key to success, banks should collaborate, compete and
leverage to get the agility required. Fintechs have shown the way with their
innovative and agile approach to servicing the customers. Many banks have
already shown an inclination to collaborate with Fintechs. According to a
survey conducted by Capgemini and European Financial Management Association (EFMA),
in January 2017, 60% of the banks are seeking partnerships with fintechs. Even
between the banks there are collaborations on new-age technologies such as
Blockchain.
Banks could decide to compete by developing their own
capabilities in the areas where banks have already built competency or which
can become bank’s core competency. According to the survey conducted by
Capgemini and EFMA, 59.2% of the banks are developing in-house capabilities.
Also, the banks can leverage the capabilities from
outside if it needs complementary tools or technologies. According to the same
survey conducted by Capgemini and EFMA, 38% of the banks are investing in
Fintechs.
Collaborating, competing and leveraging as the need be, provides
a bank with wider range of digital capabilities at a much faster rate.
However, these should be evaluated continuously on the
parameter of return on investment.
Use
Application Program Interfaces or APIs- APIs like products, should
be actively maintained and supported, and should be easy to use.
First thing is that APIs can be given as an offering to
customers so that customers can integrate their systems with the bank for real
time transaction updates.
Key point is to harness developer ecosystem for
innovation- the ability to quickly simulate production APIs or create new APIs
for use during innovation days and hackathons; and the ability to create
cross-platform software development kits (SDKs) and app templates that show how
to consume APIs, and then easily distribute the source code to developers to
reduce the time and effort of creating apps that consume the APIs. The point of
all this is to bring agility and innovation to a centuries-old industry, by
tapping into an ecosystem of bright developers
This results in rapid product development and reduced
time to market.
Governance
and Assurance- Digital transformation creates new
challenges including security, regulatory compliance and legacy system
integration. An additional challenge comes from business cycles that are
getting faster and faster. To answer these new digital challenges like faster
business cycles, new risks and need for more firm-level integration, companies
need firm-level governance around their digital initiatives. In this context, I
would like to give a special mention to cybersecurity. I have worked
extensively with the regulators including the Reserve Bank of India and they
are really concerned about this. In this digital world, banks need to bolster
their cybersecurity, otherwise they may have to incur huge losses or they may even
get out of business in the extreme circumstances.
Also, the standards should be followed such as BIAN (Banking
Industry Architecture Network), IFX (Interactive Financial Exchange), PSD
(Payment Service Directive), ISO (International Standards Organization) and
others.
To keep pace with the digital disruption and radical
changes across the banking industry, financial institutions must increase their
focus on digital quality assurance, which results in a superior end-user
experience. User tolerance for poor software quality and the application errors
and performance issues that ensue, is raising the bar on quality assurance.
Measure, Evaluate and Evolve
The entire digital transformation process needs to be
measured and evaluated. Learnings need to be captured and the process should
evolve giving incremental returns. Key metrics are customer satisfaction,
return on investment, competitive advantage and sustainability.
Benefits of Digital Transformation
The final question is what will the banks get out of the
digital transformation. According to Mckinsey’s research report- strategic
choices for banks in the digital age- published in 2015, - The winners in
digital transformation may realize a profit upside of 40% or more.
However, what will happen to a bank if it does not get
its strategy and execution right. According to Mckinsey’s strategic choices for
banks in the digital age report- The digital laggards could see up to 35%
profit eroded.
Key takeaways from the study are:
- With the threats from all quarters and success shown by digital transformation- it has become imperative for the banks to transform digitally for the sustainable revenue and profit growth
- With the choices that customers have- their needs and wants should be at the center of the transformation
- Culture could be one of the biggest obstacles in innovation and agility required for digital transformation and should be given adequate consideration
- Digital transformation cannot be confused with one off project and a holistic strategic perspective and execution plan is needed
Please connect with the author of the article at jhasumit@gmail.com for any help on digital transformation of banks.
http://www.mckinsey.com/industries/financial-services/our-insights/strategic-choices-for-banks-in-the-digital-age
https://www.se.capgemini-consulting.com/sites/default/files/world_fintech_report_wftr_2017_final_web.pdf
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