The handwriting on the wall is becoming clearer and clearer. The banking ecosystem is experiencing a level of disruption that has never occurred in the past. The combination of accelerating consumer expectations, competition from fintech and big tech providers, a dramatic shift in traditional business models, and the slowness to embrace change by many legacy financial institution leaders is putting the long-term viability of many organizations at risk.
This is not a new call to arms, but a continuation of a trend that has only become more intensified since the pandemic. In fact, in 2018, VP and veteran Gartner analyst, David Furlonger, stated, “Digital transformation is largely a myth as institutional mindsets, processes and structures stand firm. Established financial services providers will have to move faster on digital business by building digital platforms or finding niche products and services to sell on others’ platforms.”
Part of the challenge is that much of the foundation needed to future-proof a banking organization is not in place. This includes data and analytics maturity, a focus on innovation, back-office operations built for digital deployment and leadership that supports the investment in technology required to be competitive going forward. Unfortunately, while progress has been made by many institutions on several of these fronts, the change is far too slow.
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Relevance Begins with Data and Analytics
Consumers have come to expect that today’s modern businesses will make insight-driven recommendations and deliver experiences similar to what they receive from firms like Amazon, Google, Facebook, Apple and others. If a financial institution does not have a 360-degree view of their customers, they can’t provide advice and offers that are both timely and contextual. Unfortunately, most financial institutions have indicated an inability to use data at their disposal to extract actionable insights.
The use of data and analytics must extend beyond marketing, however. While data and applied analytics will assist in improving acquisition, engagement, cross-selling and loyalty, it also provides the foundation for improved decision making and supports third-party partnerships. The lack of data and analytics maturity is not caused by banking executives not understanding or believing in the importance of using data to drive results. Most firms are challenged by the scope of what’s needed. For the vast majority of organizations, there is a need to partner with third-party organizations that can quickly improve the data maturity and deliver tangible results.
Financial institutions that reach the highest levels of data and analytics maturity will benefit from improved customer experiences, better decision-making, increased agility and the potential to work with fintech and other third-party organizations to drive innovative solutions to the marketplace. In short, data and analytics lies at the core of being able to future-proof a bank or credit union.
The Need for Innovation at Digital Speed
Consumer expectations and the capabilities of modern technology has combined to drive a much faster approach to innovation. As opposed to sporadic introductions of new features, benefits or products, financial institutions must embrace the concept of innovation that occurs at a scale, speed and scope far beyond what was required in the past.
Making effective use of technologies such as cloud computing, data analytics, and artificial intelligence will help support innovation at digital speed. These components are necessary to support both digital transformation and digital innovation.
Innovation Action Over Analysis:
“Organizations will not always have the luxury to conduct extensive analysis before acting.”
Now more than ever, there is a greater value placed on “action over analysis,” leveraging the power of trial-and-error experimentation. Innovation success needs to occur both inside and outside the organization, rethinking existing processes and business models for a digital world. We are not just talking about technology, but engaging the people within the organization for ways to improve all deliverables. The challenge is that innovation at scale usually creates tension between new and existing business models. Letting go of what worked in the past is difficult.
Moving forward, an ability to innovate rapidly will become increasingly important. We only need to look beyond traditional banking at the plethora of fintech and big tech firms changing the competitive landscape. Much of the innovation in banking is occurring within these firms that were born digital. For banks and credit unions that have been around for decades, the need to “become digital” will require the ability to innovate at speed.
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The Risk and Opportunity of Embedded Finance
Consumers are increasingly seeking simple, holistic, embedded and direct digital experiences. They value their time and understand – more than ever – how data, analytics and modern technology can deliver personalized experiences, making seamless connections between shopping, buying and using products and services seamlessly. In response to these expectations, more and more financial and non-financial organizations are creating platforms for commerce that embeds financial products and services.
The growth of embedded finance is driven by the desire to retain customers and increase their lifetime value without requiring the consumer to leave their app. Organizations like Amazon, Uber and PayPal are building platforms that increase engagement while providing increased value.
Traditional banks and credit unions are beginning to realize that embedding financial products within non-financial platforms can threaten their existing customer relationships. While enabling non-financial (or even fintech) organizations to distribute banking products can be a high-volume business, the margins are low and the loyalty could be fractured.
Alternatively, building a banking-as-a-service (BaaS) platform can create alternative revenue models, with funding coming from sources beyond the end consumer. In addition, by becoming the “hub” of financial relationships, across several platforms and with many partner solutions, loyalty and customer value can be increased. The question will become whether an organizations has a strategy to compete with financial and non-financial digital leaders?
Back-Office Automation for Digital Transformation
Since the pandemic, many banks and credit unions have enhanced their digital solutions. From online banking, to mobile applications and payment solutions, financial institutions have made it possible for consumers to do their banking without visiting a branch. Unfortunately, far too many processes at banks still rely on people, paper and severely outdated back-office processes that inhibit the deployment of fast, simple and seamless solutions.
Instead of adding new layers to existing processes, most institutions would be better served by ‘starting from scratch’ when trying to build back-office solutions to support digital experiences.
A significant opportunity exists to completely rethink existing processes and automate the back offices. By reworking IT architecture, leveraging data and analytics, banks can have much smaller units run value-adding tasks, including complex processes, such as deal origination, and repetitive activities that require human intervention, such as financial reviews.
In the past, modifying or launching new products has usually involved adding new layers of product features, benefits and procedural requirements. This has resulted is increasingly complex business processes that are very hard to automate and impossible to support digital experiences. To remain relevant in the future, organizations must ‘start from scratch’ when rethinking the back-office, looking for processes and procedures that can be done more easily and not involve the consumer (or internal staff) unless absolutely necessary.
New Leadership Thinking or New Leadership?
As we look to the future, modest changes to last year’s strategic plan are insufficient. Organizations need to forecast the future state of the banking ecosystem, identify gaps that require immediate action, and reset priorities and investments appropriately. This requires new leadership thinking or new leadership altogether.
As was stated in an article in The Financial Brand, “It is during times like these that strong leadership is required. It is one thing to lead during a crisis. It is entirely different to maintain speed and agility as part of an ongoing strategic mission. How do organizations keep the momentum going? How does a bank or credit union reflect on the gaps that were amplified when the world came to a screeching halt?”
Leaders must move out of their comfort zone that has worked in the past, embracing the change that is needed for the future. Many leaders have been with the same organization for decades, surrounded by other leaders with the same legacy. An existing bank or credit union cannot be prepared for the digital future, resting on the laurels that brought success in the past.
Leaders must articulate a new digital vision every day across the organization, eliminating fear and confusion around the massive changes to business as usual. “Organizations must redefine what it means to be a ‘digital bank’ and what is required to be ‘customer-centric’,” stated The Financial Brand. Leaders must share the vision they have for employees, customers, their strategic partners and investors despite not knowing for sure what the future may bring.
As referenced often by the Digital Banking Report research, being a fast follower for data and analytics maturity, innovation and digital transformation is no longer a winning strategy. While there is no reason to throw out all that was learned in the past, it is not wise to hold onto past assumptions that may no longer be valid. A new digital culture must be established that can survive as customer expectations and competitive norms change.