Digital transformation has gone beyond being a rite of passage to become competitive in banking. Now it has become a right of way, a path that all financial institutions must keep treading in order to stay competitive.
“The landscape has changed very rapidly,” says Aurélie L’Hostis, Principal Analyst at Forrester. “The pace of change has accelerated. And things are going to keep changing, so institutions have to see digitalization not as an exercise to go through, but something that never ends.”
“Banks will have to be a lot more adaptive. They have to be creative. And they have to be resilient,” says L’Hostis. This is a lesson and a legacy of the pandemic, and, is part of the much-predicted “new normal” for banking.
Institutions that don’t adopt this mindset will find competition and survival much harder, the analyst suggests. “It will be very difficult for them to innovate at pace and their future may not be as bright as it might be.”
What makes this especially worrisome is that a Forrester report, “The State of Digital Banking, 2022,” indicates that many institutions here and around the world don’t understand that circumstances are speeding up.
When asked which description best matched their organization’s digital transformation efforts thus far, bankers answered:
- Implemented and currently expanding, 35%
- Implemented but no immediate plans to expand, 21%
- Implementing, 19%
- Planning to implement in the next 12 months, 12%
- Interested but no immediate plans to implement in the next 12 months, 6%
Forrester forecasts that one out of four banks worldwide will increase their tech spending by 10% or more in 2022.
Innovation Must Become Woven Into the Whole Institution
“New players — including fintech startups and nonfinancial digital brands branching into financial services — continue to flood the market with faster, better and cheaper services, altering the competitive landscape,” the Forrester report states.
A few years back, many financial institutions latched onto the idea of innovation labs, or at least, innovation officers. While some institutions avoided the trappings and toys of “innovation theater” in favor of real work, having a lab or function devoted to new stuff was mostly about “hanging with the cool kids.”
While many labs still exist in some form, you don’t hear so much about them anymore. L’Hostis says this is a product of changing attitudes about innovation in the wake of the need to keep up with digital transformation and the advances of nonbanks.
“The focus now is not so much on innovation for the sake of innovation and having an innovation lab. It’s more on product innovation and customer experience.”
— Aurélie L’Hostis, Forrester
The report indicates that the pandemic stripped away the window dressing in favor of an insistent emphasis on real progress.
L’Hostis explains that simply setting up a pilot confined to an innovation lab isn’t going to improve customer experience nor personalize banking services, which are both priorities in her view.
“It’s actually about constantly iterating on what you’re doing, accelerating the shift to digital,” says L’Hostis.
The report traces the many new brands that focus on solving customer needs. This ranges from accounts that accommodate shared finances in families or other social groupings to brands that match consumers’ desires to support social, governance and environmental goals.
Organizing the ‘People’ Aspects of Digital Transformation
While spending more on technology is important, building digital banking operations actually takes a great deal of people input. L’Hostis believes banks will increasingly find themselves in a race for talent and a continual need to evaluate the type of talent they need.
“Banks are going to have to spend a lot more on human resources,” says L’Hostis, “in part because some people might have left, and because as they accelerate their digital transformation, they’re going to have to rely on technology workers, software engineers, data scientists, and so on. So you either have to train — or retrain — your own employees to fit these needs or you have to find new people to join your organization.”
The Cold, Hard Reality:
Part of being adaptive will be to frankly assess the state of the institution's current employee base in the light of digital challenges.
“Grade your talent,” L’Hostis advises. This will help identify gaps and weaknesses that need to be fixed before progress can be made.
A Forrester case study that illustrates ways to do some of this concerns Standard Chartered Bank. A blog based on that report notes that the bank stressed reskilling both its business and technology teams as part of digital transformation. In addition, the blog indicates, innovation is being delivered much more quickly now because cross-functional teams with shared accountability were implemented.
Ultimately all of this requires money and getting a good share of the budget dollar. Selling top management on the need for this, according to the report, means demonstrating how the investment will yield more revenue, cost cuts, faster time-to-market and enhanced customer experience.
Connecting with Partners to Achieve Real Transformation
Partnerships, tapping other organization’s skills, are another facet of the people part of the transformation process. L’Hostis expects to see more of this going forward, in both directions, with banking organizations becoming part of other companies’ innovations through embedded functions and fintechs and others becoming part of banking operations.
“In a way, it’s a reshuffling of the cards,” says L’Hostis. Institutions will be deciding what role they prefer.
“They will be choosing the route they want to take to markets,” says L’Hostis, “whether they want to be the provider of a digital platform or a marketplace or whether they want to be among those providing products and embedding them in those platforms.”
Forrester sees such partnerships as increasingly important as open finance/open banking structures spread around the world.