Why Most Digital Banking Transformation Efforts Have Stalled

There is almost universal consensus surrounding how financial institutions must transform digitally, but new research reveals that progress is still too slow, while some haven't made any headway at all. This is a colossal recipe for failure.

Digital transformation is growing more pervasive in every banking organization, moving beyond “projects” to organization-wide initiatives involving technology, product development, business models and culture. Budgets are increasing as organizations are finally updating legacy systems and ownership of the process is moving up the organization structure.

While the potential benefits of digital technologies are well documented and accepted by a majority of bank and credit union leaders, the deployment of digital banking transformation does not appear to be keeping pace, according to the Digital Banking Report, “State of Digital Banking Transformation.” This is concerning, given that the pervasiveness of required digital transformation is moving beyond the IT area of banking to include virtually all areas of the organization.

Highlights of this report, sponsored by Pega:

  • Digital banking maturity is very low in retail banking, with only 12% of firms indicating that they are “leaders.”
  • There is a very strong correlation between innovation leadership and digital transformation leadership in retail banking.
  • The current focus on retail banking transformation is in the infancy stage (1-3 years), with most efforts revolving around delivery channels.
  • Less than 50% of organizations believe they are prepared for competitive threats, customer expectations or technology advancements.
  • The most successful digital transformation efforts are led by a CEO (37%) or the Chief Digital Officer (17%) and have a formal team with a broad cross-departmental scope.
  • Most organizations have not integrated advanced technologies (design thinking, AI, robotics or IoT) into their digital transformation process.
  • The biggest challenges to digital transformation in banking is limited budget, legacy culture, talent availability and IT infrastructure.

There are also strong indications that leadership lacks experience in implementing such massive transformations. This has resulted in a prioritization of technology being purchased that may only scratch the surface of needed transformation. Finally, it also appears that the current financial strength of the industry is resulting in complacency around making large, overarching changes to what has long been the operating norm in banking.

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Digital Transformation Still Lacks Maturity

Digital Banking Report research indicates the proportion of financial institutions that consider themselves digital transformation leaders is very modest (12%). And, while the term “fast follower”could undermine the concept of “digital transformation leader,” only an additional 34% of financial organizations place themselves in this category. This places more than half (55%) of organizations at a self-proclaimed level of digital transformation maturity that has a negative impact on the future of the overall business model.

What is interesting is the correlation between the percentage of organizations who see themselves as digital transformation leaders and those who considered themselves “innovation pioneers” in the Innovation in Retail Banking report published in August 2019.

Digital Transformation Starts at the Top

While it is apparent that the importance of digital transformation is now a given among senior leaders, it is still not universal that these leaders have the background or experience in digital technologies or their impact. This is even more evident as we have looked at the composition of board of directors at financial institutions.

This becomes a concern when organizations are being asked to make smart decisions around prioritization of resources and digital investments. Some organizations still regard digital transformation in purely technological ways, rather than as an opportunity to change the entire focus of an organization, business models and culture.

When Digital Banking Report analyzed the ownership level of those organizations that considered themselves to be digital transformation “leaders,” it was clear that, to lead in digital transformation, you need the top leader within the organization to be the ultimate decision maker in the process. While only 19% of organizations globally had the CEO in charge of the digital transformation process, 37% of “leading” digital transformation organizations stated that the owner was the CEO (and an additional 17% assigning ownership to the CDO). Clearly top level buy-in is imperative  when you are not only buying technology, but trying to shift culture.

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Digital Transformation Requires Broad Organizational Buy-In

In the digital age, having top level leadership is imperative, but the importance of strong teams can’t be overlooked. When pursuing a digital transformation process, effective leadership is not as much about telling people what to do, but more about inspiring, nurturing and persuading. It is about setting the right context to enable great work and to provide a compelling vision. In the context of rapidly changing digital banking environments, horizontal collaboration and effective multi-disciplinary working takes on a heightened level of importance.

The Digital Banking Report found many different structures of teams being used for implementing the digital transformation process. These teams included cross-functional and interdepartmental structures with some of the teams being centralized, and others having a decentralized structure. One-third of the companies surveyed (33%) had a formal team with executive sponsorship and a broad cross-departmental scope. This is encouraging because it suggests an enterprise-wide focus with expanded involvement impacting multiple areas within the bank or credit union.

Of the remaining companies, 17% of them reported a formal team with limited departmental scope, with 12% having formal teams with limited executive sponsorship. Close to one-quarter of the organizations (24%) were informally structured with 14% having no digital transformation team.

As expected, the make-up of the teams within surveyed organizations are heavily technical in nature, with 81% of companies reporting IT played a role in their structure. Also impacting these teams were the areas of marketing (65%), operations (56%), product management (54%), channels/delivery (54%) and customer experience (52%).

Much of this composition reflects legacy organizational thinking, where branches, marketing and products are believed to be important components of digital transformation. While they are, the scope of transformation in successful organizations (“leaders”) positions innovation and customer experience at a much higher level relative to non-leaders. It is important to note that at “leader” organizations, virtually all areas of the institution have higher levels of participation, indicating a broader scope of vision.

Digital Transformation Should Impact All Areas of Financial Institution

Although digital transformation efforts have focused on the IT function in the past, every component of the organization must be transformed to compete in the digital banking ecosystem. Unlike many industries where IT is the primary component of digital transformation, the efforts of most financial institutions revolve around delivery channels, products/services and customer experience.

As we look at the top areas of focus for both the survey respondents as a whole as well as those from ‘leader’ organizations, it is encouraging that a significant number of banks and credit unions are moving deeper across the organization, including marketing, operations and sales.

According to Brian Solis, companies that say their digital transformation efforts are focused on specific business units or disciplines are typically in the early
stages of digital transformation. In these companies, resources are concentrated on a single unit of the organization — either on its own or as an executive sponsored effort — that is undergoing transformation based on a specific goal.

The more advanced organizations are working on inter-departmental goals, with many areas of focus. Over time, it is hoped that digital transformation efforts at less mature organizations expand across the organization to provide all of the benefits that can be achieved through an overarching process.

Investment in Digital Transformation Often Focuses on Mobile

When Digital Banking Report asked executives about the types of investments in digital technology their organizations were making, 80% responded that they were investing in mobile technologies. Not only does this illustrate the importance of the mobile banking channel to the execution of digital technology goals, but may also indicate a rather narrow definition of digital transformation.

Rounding out the top three primary digital investments were web technologies and cloud-based services. It is important to note that after the top three digital investments, investment in other key components of genuine digital transformation dropped by 50% or more. While it may initially appear that “leader” organizations invest less in the digital technologies that were at the top of the list for our overall surveyed audience, in reality, the investments in the “second tier” of digital technologies actually increases significantly, providing a balance of investment that can move the entire organization forward.

Of special note is the fact that “leader” organizations commit a great deal more of their proportional budget to key elements such as design thinking, big data architecture and advanced analytics.

The Digital Banking Report research finds that there is a set of steps that will improve the chances of a digital banking transformation succeeding. These include:

  • View the digital transformation process as overarching, creating new business processes and integrating new technologies from the inside out.
  • Have digital-savvy leaders who are willing and able to lead an entire organization in the digital transformation process
  • Build the workforce of the future, providing the foundation for education and hiring
  • Focus on speed of delivery, personalization and customer engagement
  • Support a culture of innovation and encourage the building of new business models

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