The Future of Digital Transformation in Banking

November 16, 2018         By: Pat Patel

Banks are facing huge pressure to step up and give customers the experience they want – a seamless, multi-channel offering rooted in both a physical, and more importantly, digital presence. But the big incumbent banks face a series of uphill battles in trying to transform fast enough, and are often being outpaced by disruptive digital-first companies stepping into the financial space. Legacy systems, processes and people are three of the biggest challenges the traditional banks face when making a move. Nonetheless, move they must, either going at it alone or partnering with a digital-first leader.

Arguably, one the biggest hurdles to change that the banks face are their entrenched legacy operating systems, so hardwired into their DNA that any talk of change is often dismissed or postponed. These systems are complex and high-risk, with some running more than 600 inter-connected software applications at a time, resulting in siloed data and enormous operating costs. These systems are estimated to guzzle up to 15-25% of a bank’s IT budget, with large amounts eaten up simply by maintenance costs. Cost isn’t the only issue – legacy systems are limiting the banks’ abilities to scale, move fast, and, most importantly, deliver great user experiences and customer service.

As a result, many banks struggle to service customers effectively and efficiently across their physical and digital channels. Improving the digital customer experience is no longer just a ‘nice to have’ and is now essential to survival. This extends to leveraging customer data seamlessly across all channels to better serve their clients’ needs, instead of pushing products that customers simply don’t want or need.

Big tech companies are light-years ahead in offering a customer experience tailored to customer needs, based on data and behavioural insights. The benchmark for what good looks like has shifted. Customers want 24/7 availability, real-time capabilities, personalised offerings and an overall low-friction customer experience. Competitors, whether from startups or tech giants, are already serving this expectation, and with barriers to entry reducing, banks must move faster to keep up.

Competition from digital-first companies is intensifying as customer deposits and balances in current accounts become a key battle ground. Challenger banks have already demonstrated a model that is operationally superior and is able to provide a much better customer experience. According to the recent Citi GPS report on ‘Bank of the Future’, it is estimated that challenger banks can service clients at a 40-70% lower cost than traditional banks. Being unencumbered by legacy tech has proven itself a great advantage and the volume of these challengers is increasing globally.

While scaling profitably is always likely to be a challenge for most challengers, there are exceptions, such as Ant Financial’s MyBank and Tencent’s WeBank. Both are able to leverage their respective wider businesses portfolios, in particular, the technological capability which enables a constant stream of new products to be developed. The ability to develop new products seamlessly is a major issue for traditional banks, again often due to legacy systems.

Whether a bank should build something entirely new from within, partner to do so, or even build something new outside of the confines of the organisation remains a key questions banks are working through. Some banks are hedging their bets and pursuing two or three options.

The first and second routes, building new from within or partnering to do so, seems to be the route most favoured, but some banks have also begun to build brand new banks from outside their own four walls, such Standard Chartered in Hong Kong or Santander in Spain. Naturally this is a costly project fraught with pitfalls both externally and internally from the compliance team (also known in some quarters as the business prevention department). Partnering might be the simpler route forward.

Chinese tech giants are certainly up for the challenge and are moving to become technology providers to banks, leveraging their advanced cloud technology, AI, machine learning and data analytics expertise. This is potentially a massive game changer. Leveraging B2C experience and, in the case of Ant Financial and Tencent, their respective banks, provides a great way to test and trial new services outside of a live operation. Some are referring to this type of proposition as a ‘super app model for banks’, while other are referring to it as a financial cloud with a suite of modules from lending to payments and savings. This essentially enables banks to cost-effectively improve their offering to customers both online and offline in a contextually seamless way. These new platforms also allow banks to manage customer data better and significantly reduce the complexity associated with regulatory compliance management and new product development. 

Ant Financial, the pioneer of the super app via its Alipay product, is currently leveraging its tech capability to be a partner to banks, such as its recent agreement with China Everbright bank. Under the agreement, Ant Financial will share its financial technology capabilities and know-how with China Everbright to help the bank develop cloud computing, internet finance, mobile payment, artificial intelligence-driven applications, smart risk management systems, as well as biometric verification.

Similarly, Tencent has been working closely together with Sunline to provide intelligent financial solutions, anchored around the core concept of providing ‘banking everywhere’ in a seamless way. Sunline and Tencent will jointly launch a brand-new portfolio, integrating their respective technology advantages. Fusing Tencent Cloud’s technology in cloud computing, big data and AI platform capabilities, Sunline aims to help banks achieve “banking everywhere” through seamless integration with social media and mini programs like WeChat and QQ.

Ultimately, the road to digital transformation for the traditional banks will be littered with wrong turns and pitfalls – no one model is a proven winner, yet. It will be interesting to see how the landscape evolves and whether going at it alone or partnering with a tech company operating in both the B2C and B2B market will be the most effective way to compete. My bet is on collaboration – it’s faster and plays to the strengths of both partners. The true challenge becomes finding the right partner fast enough to beat the digital-first challengers going at it alone, without the weight of legacy chains bringing them down, they’re already running at lightning speed.

Pat Patel, Global Content Director – USA, China, Europe, Singapore

As the Global Content Director at Money20/20, Pat gets to travel the world speaking with the leading companies and rising stars within the Tech, Financial Service and Retail sectors. This enables a detailed insight into the strategic priorities for companies, current opportunities and challenges facing the market today and tomorrow. Pat led the content product and market launch of the successful Money20/20 Europe and Money20/20 Asia events, the largest launches in the wider parent company’s history. Currently has overall content responsibility and oversight of four event platforms spanning the world which enables a truly global view.

Prior to Money20/20. Pat worked at VocaLink, one of the largest and most innovative ACHs and broader payments company, working in the strategy team with a focus on real-time payments systems and new value propositions that can be developed on top of a state of the art platform from mobile initiated payments to data driven products. Pat started his career in the insurance sector within Actuarial and Risk teams. In his spare time he actively supports the FinTech ecosystem across Europe, from mentoring startups to supporting corporate innovation programs to delivering industry insight presentations at events and national FinTech initiatives.