Six Challenges Of Digital Transformation In Banking
Recently, my company published an article, "Digital Transformation in Banking: Last Chance?", which listed the key aspects that banks should focus on to successfully transform into digital businesses.
Since ordinary people who can make mistakes are behind large-scale projects, these projects don’t always go smoothly. You must have heard about TSB Bank's case that resulted in the loss of 26,000 customers and had a negative impact on its finances and reputation.
The tricky aspect
So, is digital transformation worth it if it carries such serious risks? Let's look at some of the reasons that prevent some banks from starting this process in the first place and what challenges others may face while they implement digital transformation projects.
My company spoke with several IT directors from Eastern European banks about how much it might cost the banks to go digital and how to calculate that cost. We came to the conclusion that while a bank is implementing the active phase of transformation, the level of investment that creates tangible results is about 10% of the bank's annual expenditure. The active phase typically lasts for one to three years. In the future, the level of investment may gradually decrease, but it’s obvious to me that digital transformation is a process that cannot be stopped once it’s started. It requires constant financial support.
Many IT directors may have difficulty justifying and obtaining investments, which can prevent a large-scale bank transformation. One of the main mistakes I've seen here is choosing an extremely direct approach. Shareholders typically receive an account of the associated costs for which, as a rule, hardly anyone is mentally prepared.
You can avoid this by focusing not on costs, but on indicators that reflect the benefits that the bank will get from an investment in digitalization: This could include the amount of money the bank will save, productivity growth, etc.
2. Digital Transformation Director, Who Are You?
This role isn’t new, but I've found that it is more in demand than ever.
The question is how to evaluate their performance. What is certain is that the evaluation should be based on specific metrics, such as increasing digital channel penetration, expanding the customer base, increasing customer satisfaction, and so on.
It may take a long time before the director reaches the specified metrics, so it’s important to define specific interim indicators. After all, speeches they give at conferences, promising articles they publish in specialized publications and the buzz of introducing grandiose plans to the senior managers are not digital transformation.
Some transformation directors are not able to have a huge amount of influence over anything and instead have a marketing function. They represent the bank as a modern enterprise in the eyes of others.
In my experience, digital transformation is unlikely to last less than three to four years. Take a look at a potential candidate's previous jobs to see if they have seen such a process through to the end.
3. Digitization Instead Of Digitalization
You cannot change a bank's business model by renovating just the facade. Similarly, I believe it’s impossible to substitute digitization for digitalization. The key difference between these terms is that digitalization is the creation of an innovative process or product, while digitization is an improvement of existing processes and products. Hence, digitization may not result in substantial savings.
In many cases, banks choose a less thorny path and try to digitize existing business processes while passing them off as a breakthrough.
Those who advocate for the digitalization of a business should first think about making processes highly effective. The degree to which you exclude the human factor from business processes can serve as a measure of effectiveness.
4. Banking Processes Created By An ‘Unknown Specialist’
I've come to the following conclusions about how certain business processes usually work in a bank:
• In most cases, the bank doesn't describe its processes at all.
• Each business unit builds its processes based on its capabilities and understanding of "what is good."
• The culture of business process optimization is almost absent, as are special units engaged in this process.
The solution may be to involve third-party consultants, as well as specialists from other divisions of the bank who are not business process owners, in the process of restructuring and revision.
5. Senior Management's Lack Of Understanding Of The Necessity Of Digital Transformation
This is probably the most difficult of all these challenges. In my experience, not many managers understand, or even want to understand, that IT is the “locomotive” of our time. At the same time, projects are very expensive, and the “don't touch it; it works” approach is still widespread, so why should they change anything?
A lack of understanding leads to a lack of support or insufficient support for those who are responsible for the transformation projects.
The hope is that there’s at least one person on the board who is a strong supporter of digital transformation.
6. Synergy With The Bank's IT Team
I believe that the best result will be achieved through synergy between the bank's team and third-party contractors. Bank employees shouldn't treat contractors as competitors; it's important that they work together as a single mechanism. You can obtain excellent results when the contracting team includes the product owner, who is not only a competency holder but also a “bridge” who can ensure that the contracting team receives the necessary support
Digital transformation is associated with a number of challenges, and there’s no one correct path to choose. Lack of investment, competent personnel and support from the top are some of the problems that you may face. However, the main and most difficult issue is how to change the mindset of your employees, who you need to convince to become agents of change.
Author: Aleksander Khomich