In many ways, the Covid-19 pandemic has become a catalyst for change for financial institutions all over the world. It has presented banks with an opportunity to make bold changes at a dramatic pace. On the one hand, banks are now working round the clock to keep their distribution channels open while adhering to social distancing guidelines. And on the other, they have been cornered into performing functions that weren’t originally designed to be carried out remotely.
From a customer’s point-of-view, Covid-19 has accelerated the transition to digital payments. Having said that, vulnerable customers also look to their banks for tangible support during these stressed times — waiving late fees, reducing minimum payments, or permission to skip a loan payment.
However, it’s clear that nothing quite replaces that element of human interaction. As industry reports indicate, customers are still using human channels to resolve problems, seek advice and open new accounts. In fact, a recent report by market research company J.D. Power & Associates revealed that digital-only customers are significantly less satisfied than those who bank digitally and also use branches. A good in-person customer experience, including relevant advice, carries a lot of weight, even among millennials. This has forced banks to rewrite their physical and digital strategy and identify new ways to meet customer expectations while simultaneously rethinking their business models and revenue strategy.
Most banks embarked upon their digital transformation journey years ago and have clear digital strategies. However, most of these strategies are limited to the last mile journey — a digital strategy at an enterprise level is what’s missing. The pandemic has strong-armed banks into fast-forwarding their digital transformation plans to improve the overall customer experience — better products, better solutions and better propositions. In a way, this global health crisis has forced banks and many other financial institutions to compress their five-year digitalisation plans into a mere few months.
What are some of the roadblocks banks from around the world are facing at the moment to forward their digital strategy?
There are two parts to this answer, both of which are interconnected. One, banks are holding on to their legacy core that has been an excellent system of record and delivered clear benefits but is not agile by nature. Two, banks think channel — customers don’t. So, in addition to an upgrade in technology, financial institutions also need to upgrade their thinking. I cannot stress enough that customers need to be placed at the center of all digital strategies, and the rest will fall in place. Allow me to elaborate.
Banks have spent millions of dollars on digitising their customer-facing layer, which has largely made customers happy as this means fewer branch visits, numerous possibilities of engaging with their bank at a click of button either via their mobile phones or laptops. Overall, this has bred positive feedback from customers, which is good progress, but more work needs to be done. The majority of banks are still unable to make the most of the goldmine they have in their possession: customer data. This in turn limits a bank’s potential of capitalising on open banking opportunities.
One of the biggest barriers to a successful digital transformation project is a bank’s inability to own the customer experience. I am a huge fan of how Apple changed the definition of customer experience with the Apple Store. Have you ever seen an empty Apple Store? It’s easy to understand what Apple did differently: they made a profound impact by taking greater control of their customer journey. In the same vein, physical bank branches remain key for customer engagement and should evolve into experience centres like Apple Stores, offering a place for customers to explore products and services, a place to address complicated banking problems, and a place customers can feel safe.
In today’s climate, banks face unorthodox competition from the likes of Google, Facebook and Alibaba to name just a few. In order to continue to remain the preferred choice of their customers and stay competitive as well as relevant, banks must aggressively adopt the digital route and transform their go-to-market approach.
What can banks do when legacy core systems hinder their digital transformation journey?
The core is meant to be a system of record, and over the years it has become much more than what it was supposed to be. Unfortunately, while it has delivered additional capabilities, it has also acted as a bottleneck for banks as it does not have the agility to keep up with today’s ever-changing world.
Banks need to look at anything that impacts the customer directly and lift it out of the core — in other words, “hollow out” the core. These applications should sit in a layer above the core, which we like to call the “digital core”. This layer is intelligent and prescriptive. This digital core forms the bridge between the current customer-facing capabilities and legacy core used by the organisations of today. It’s the middle layer that acts as a supplementary system that can handle integrations with digital banking, designing new products and services and partnering with fintech companies.
It’s about time; banks need to let go of their inhibitions and use technology as a lever to reinvent and change their existing business models.
A CTO guide to digital transformation in financial services
Why is there a need for the battle around banking systems to move from core to middle layer?
Changing core banking technology is an expensive investment in terms of cost, time and resources. These core technology transformations can take up to anywhere between one and four years depending on the size, complexity and scale of the transformation. Additionally, there is the fear of core banking overhauls being risky and prone to failures due to lack of expertise, knowledge, delays, budget over-runs and so on.
By deploying a modular and flexible middle layer, which acts as a digital core, banks can create a truly open ecosystem that will foster collaboration and innovation, without the exorbitant costs or hassles of completely modernizing the core. The transformative intermediary layer can ensure that the core platform remains strong and resilient, while it handles the data, lifecycle processing, connectivity and batch processing required of an intelligent and responsive organisation. It is the recipe for creating an agile and customer-centric bank for the digital age.
What kind of an influence does a bank’s digital transformation journey have not only on customers, but current and future banking staff?
The banking industry continues to be perceived as a traditionally run sector and struggles to entice young tech-savvy millennials. A large number of banking technology experts who have been managing these large and complex legacy applications today are nearing retirement, and there is little documentation to preserve or transfer their learnings and experience to the younger workforce. The result: a vicious cycle where on the one hand, banks’ legacy core systems are ill-prepared to handle the new-age demands, while on the other, they lack the resources to digitally transform their core without risking serious failure or downtime.
The digital transformation strategy needs to look at each and every customer journey from end-to-end, to make sure the customer experience is more holistic and complete. When banks do leapfrog to digital transformation, they need to pay very close attention to one of the most critical components of the system: their front-end staff — the ones who own the relationship function. This set of employees need to be trained to become more functionally adept as they are now in a position to be more informed about their customers.
This set of staff especially benefit from the data captured by the bank to truly provide unbiased advice to their customers. With these insights, these relationship managers will be able to offer customers product portfolios — just like when you walk into an Apple Store and the staff size up your requirements and advise you on a specific product, no matter how expensive or inexpensive it is. Focusing on this level of customer-centricity will earn banks lasting customer loyalty and significantly benefit their brand and reputation.