Digital Transformation in Financial Institutions: The Keys to Success

Potent forces at work in the financial services landscape are altering the customer-financial institution relationship in fundamental ways. With a growing number of challenger banks and fintechs disrupting the industry, the commoditization of basic financial products, and increasingly sophisticated user expectations, competition for customers among deposit-taking institutions has never been greater. Meanwhile, measures to constrain the spread of COVID-19 have accelerated a global shift into digital financial services. Customers hitherto reliant on face-to-face banking have been forced to migrate to digital channels, while others have gone from using a mix of services to digital-only. Taken together, all of this makes it clear that a move to an optimized digital financial services strategy is not an option, but a necessity.

For a financial institution to succeed in reshaping itself for the digital age, it must be prepared to undergo seismic, organization-wide change. Firms reluctant or unable to abandon decades-old tactics that were once successful often fail to make the pivot to digital. Such failures can be costly—they hurt customer retention efforts, erode employee morale, waste resources and damage board confidence in the ability of executives to lead effectively in these changing times.

The best avenue to success is one that follows the guideposts set down by leaders who have successfully implemented such transformations in their organizations. Adopting the best practices of these pioneers in the following areas can make the difference between a fast and smooth transition and one that flounders and fails:

Establishing Direction:

  • Digital strategy and roadmap
  • Customer centricity
  • Metrics and KPIs

Implementing the transformation:

  • Speed of IT
  • Digital talent
  • Flexibility and adaptability
  • Agile methodologies
  • Collaboration, inclusion, and co-creation
  • Culture change (communications, adoption, support)
  • Innovation WITH monetization

After the Transformation:

  • Keeping pace with evolving customer needs and competitive pressures

Let’s take a closer look at each of these aspects in turn, offering insights along the way that we hope will allow you to embark with confidence on the path to digital change, while sidestepping the pitfalls that can doom these efforts to failure.

Digital Strategy and Roadmap

Sun Tzu had it right when he wrote in the Art of War: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”

The optimal route to victory is one that starts with both: a digital transformation strategy and vision and a clearly defined tactical roadmap of initiatives.

You may conceive the perfect digital vision for your future, but without a clearly mapped set of steps for your teams to rally behind, there is a risk they will not focus on the changes most critical to reaching the destination. Failure to plot your vision onto a three- to five-year roadmap of key initiatives—and to create a robust communications plan to explain that roadmap—will force your organization to interpret that vision in a vacuum. This can and will result in a divergent set of steps and create conflicting internal priorities with neither synergy nor scalability. Not only will this wasted effort slow your transformation and erode internal confidence, it will divert scarce resources from the efforts that really matter.

Customer Centricity

“Digital transformation and a focus on customer experience can generate a 20-30% increase in customer satisfaction and economic gains of 20-50%.” (McKinsey).

Every successful digital transformation has the customer at its heart. Without a laser focus on customer experience, design thinking, and your customer’s journey across the bank’s channels, both physical and digital, you will fail to meet increasingly sophisticated user needs.

Do you understand which journeys are important to each customer segment? Do you know the impediments they face in each? Are you clear on their expectations? If not, you are ignoring the most critical aspect of your digital transformation.

Financial institutions need to abandon outdated tactics centred on products and lines of business and instead train all their attention on that most crucial element: the customer.

This is no small task. Leadership must be ready to break down organizational and channel silos and align cross-functional teams so all their efforts are oriented on the needs of the customer. A Customer Experience Design (CXD) team led by a senior CXD engineer must be placed at the core of all decision-making and initiatives that relate to the customer. While it is important to explicitly call out this customer focus in your vision, the CXD team will be your champions and will help to build this discipline throughout your organization.

Even before the implementation phase of the transformation, it is essential to think through the kinds of interactions your customers will want and need. It is a mistake to assume that you can fund your digital investment through branch closures. While you may be able to reduce your spending on bricks and mortar to some degree, human-to-human interaction will remain important and must be factored into post-transformation planning. Your target delivery channel mix must include branches, which will be transformed into centres for sales, advice, and high-touch customer interactions. Your organization will need to optimize its branch footprint to maintain and improve brand presence and customer touchpoints. In this way, the branch can be used to leverage and promote your newly created digital assets.

Planning for a customer-centric future must cover other forms of interaction as well, including mobile sales forces, contact centres, online support for each channel, as well as methods for gathering, disseminating, and acting on feedback, positive and negative.

Customer onboarding, marketing activities, and training for customer-facing staff must focus on driving digital channel adoption and usage. Henry Ford’s famous assertion, “If you build it, they will come”, does not apply here. Customers will need to be educated, incentivized, and supported in their migration to digital channels. Now and in the future, digital adoption must be ingrained in all customer touchpoints and messaging. Financial institutions that began this exercise two decades ago boast excellent digital adoption numbers (usually 10-15% below a country’s Internet or smartphone penetration rate). Those that failed to focus on the “Always On” aspect of customer digital adoption register rates that pale in comparison.

Roadmap Metrics and Digital KPIs

Without data-driven decision-making based on effective metrics and KPIs, you are only guessing—both at the impact of your institution’s transformation efforts, and how and where to concentrate your resources. All business cases related to your digital transformation must include both direct and indirect revenues (e.g. the value of a large Net Promoter Score increase) to assess their true benefit. These key metrics must drive your decisions about which opportunities to pursue and how to achieve the best outcomes for the business. They can also act as an early warning system to alert leadership when a pivot is necessary to achieve maximum value.

To succeed, banks must invest in those efforts that move the dial the most and these investments must be informed by the right data, KPIs, and metrics. Effective deployment of resources cannot happen if leadership gets distracted by bright, shiny ideas that sound interesting but don’t deliver. By ensuring that investment decisions are based on measurable business and customer outcomes, you can ensure time, resources, and energy are dedicated to initiatives that will yield quantifiable value rather than being diverted down false paths.

Technology and the Speed of IT

Digital transformation is not simply a matter of making changes to technology; it is about making the right changes to technology—those that deliver better business outcomes. Your goal must be the creation of an IT infrastructure that will deliver value to both the business and clients at the pace dictated by the rapid changes in customer needs and your competitive environment.

Unlike fintechs and cloud-native disrupters, many FIs are held back by legacy tools and outdated platforms. Allowing legacy technology to constrain the speed of change is a quick path to transformation failure. Rather than delaying transformational efforts while you deal with legacy IT issues, it is better to employ a two-speed IT model: a model that enables your operation to maintain or replace legacy systems at a slower speed, while simultaneously building out capabilities to enable the more rapid transformation of a future digital technology ecosystem. These capabilities can include an API ecosystem, SaaS (Software as a Service), PaaS (Platform as a Service), Cloud, Test Driven Development, CIAD (Continuous Integration and Delivery) etc. Without a two-speed approach, your transformation will be hindered by the inevitably slower pace of change in legacy systems.

Flexibility and Adaptability

To keep pace in a rapidly evolving landscape, your business teams must be both ready and able to pivot quickly to address emerging changes in rival offerings and customer demands. Your planning process should include triggers to alert these teams to the need to reassess the roadmap and initiatives and, if needed, shift focus. This might require stopping efforts that will no longer deliver the necessary value and launching new ones that promise greater benefit. Flexibility and adaptability must become core cultural values if you are to ensure all transformation work continues to deliver maximum value.

To maximize flexibility and adaptability in your organization, you need to create enablers of business agility. These can be technical (e.g. APIs, BaaS, CIAD, Cloud, etc.), process-related (e.g. accelerated funding approval, roadmap review/adjustment, fulfilment, adjudication etc.) or cultural (agile teams, communities of practice, incubators, etc.). Creation of these capabilities and enablers will position your business to deliver initiatives faster and will allow it to rapidly divert efforts and resources to more appropriate initiatives.

Agile Methodologies

A crucial element of organizational flexibility is the implementation of agile methodologies. All your development teams—from marketing through to IT—need to be able to adapt to and meet emerging customer needs quickly if you are to maintain and grow your market segment amid today’s fierce competition. Agile forms of software planning and delivery will help your organization do just that.

If you are to successfully adopt agile methodologies you must be prepared both to invest time and resources and to understand at the outset how agile teams will fit within the structure. The best approach is to work through in advance the roles these teams will play in the context of your overall business vision—how they will include and incubate talent across the organization, how they will align their outcomes to business objectives, and how they might be scaled. Without the proper mix of talent and the tight organizational business and technology context, agile methods will not produce the results you seek and may in fact be counter-productive to the overall transformation.

Digital Talent

To build the bench strength required for the execution of your digital roadmap, you will need both internal training and external hires, both of which require careful thought and planning.

External hires can make or break your efforts. However impressive their digital credentials, you must ask yourself the following about each new hire: Do they understand the business of banking and the competitive landscape? Have they executed on digital initiatives in complex environments in the past? Can they deliver when faced with the challenges inherent to a legacy banking institution?

Hiring the wrong digital talent can sabotage your transformation efforts. A mismatch between their experience, willingness to adapt, and your institution’s culture can quickly lead to disappointment. Your newly hired talent may not understand the challenges within their new environment and, out of frustration, avoid partnering with existing teams to adapt or evolve processes and technology. With the wrong digital hires, you will face increasing internal conflict, resistance, and an inability to deliver. Further, without the right vision, guidance, and a collaborative culture, those you bring on board may decide they know best and devalue or ignore existing teams, which will lead to friction and resistance. It is essential that your new talent partners with existing talent, leveraging their knowledge of current systems, products etc., and working with them to reinvent and transform your business together.

Collaboration, Inclusion and Co-creation

Once you have made the right external hires, intermixed them with existing talent, and empowered the resulting teams to make decisions, you must ensure there is an ongoing drive for collaboration. Without a collaborative culture, and the inclusion of existing teams, companies can wind up with a separate clique of “cool digitals” who own the transformation, while the rest of their employees are left feeling sidelined, suspicious, and questioning the value of digital efforts.

To harness the full power of the talent in your organization, all business and technology teams need to be included in the transformation process. They are valuable incubators of both digital culture and digital talent, and their inclusion cuts the risk of a stand-alone digital group alienating existing staff. All teams should feel a sense of ownership of the transformation and customer outcomes, and collaboratively deliver the necessary digital initiatives. If they are fully invested in the success of the transformation, existing staff will become trusted champions within the organization as well as with customers and will help foster digital culture and methodology dissemination.

Finally, to be truly effective, business and technology need to co-create the digital enablers of your business and customers. The historic business-technology gap must become a thing of the past. Both sides must work together to execute the digital roadmap. A true business-technology partnership is one of the most powerful drivers of transformation.

Communicating the Change

All the steps above depend on organization-wide culture change. Make no mistake, culture change is real change, and it can be very challenging to deliver. All the tenets of change management apply, including the need for strong and clear internal communications. Without a clearly communicated vision, you will not win true organizational buy-in and the power of your intellectual capital will not be mobilized behind the transformation.

Digital transformation cannot and does not happen in a vacuum—it requires the involvement of many departments and the staff within them. Only with consistent messaging, by both senior executives and front-line managers, will employees recognize the importance of the digital shift and the culture begin to change.

Change can be only be effective when staff understand the reasons behind it, embrace it, and feel they have a stake in its success. Well-founded communication is the key both to helping employees see that competition and banking realities mean the organization must and will transform around them, and that they can play a role in making this future a reality. Cultural change is hard—very hard. Long-time staff can resent being pushed out of their comfort zones, while new joiners can feel jarred and unsettled.

A well-crafted effort to spell out the benefits of the transformation, set out a timeline, and direct staff to sources of ongoing support and guidance through the process can help ensure buy-in and adoption at all levels.

Innovation WITH Monetization

Up to 93% of companies agree that innovation technologies are necessary to reach their digital transformation goals. (Forrester, commissioned by SAP)

Innovation in financial services can mean many things. It can simply mean taking existing processes and redesigning them to fit a digital future, to reduce costs and to create scale, or it can refer to steps that will ensure organisational readiness to adopt undreamt of future ideas that will further revolutionize the industry. Whether on a minor or grand scale, innovation is about embracing new technologies—those that enable new business models or that bolster existing ones.

Innovation, in other words, is essential to every aspect of digital transformation, but to be successful, it must be both focused and effective.

Innovation for the sake of innovation—i.e. innovation that cannot be monetized or linked to customer benefits—may deliver changes that, although they may seem slick and exciting, will not help you achieve your business or customer objectives. When scanning the market for capabilities and/or vendor partners, you must always keep squarely in mind how each will fit with the desired outcomes and align with the capabilities on transformation roadmap. Do not get distracted by “cool” innovations and technology that will not help deliver your business goals. Otherwise, you risk diverting energies and resources from efforts essential to your transformation and causing confusion within your teams about priorities.

After the Transformation: Keeping Pace with Evolving Customer Needs and Competitive Pressures

Intensifying competitive pressures and ever-changing customer needs make digital transformation as necessary as it is daunting for today’s financial institution. A transition that takes into account the above best practices will allow your FI to proceed with confidence.

However, the completion of your defined digital transformation roadmap does not mean an end to change. Financial services technology continues to evolve at an ever-faster pace and customer demands with it. Given that it is impossible to be sure exactly what changes lie in the future, your transformation plan must include an ongoing strategy for tracking and adapting to emerging requirements and new competitive pressures.

The good news is that the changes you will have made to your organization in the course of your digital journey will provide the mechanisms to better understand the needs of your customer, and the flexibility to enable your FI to pivot swiftly and effectively to meet them.

Digital Financial can help your institution create a transformational Digital Strategy and Roadmap. This strategic framework will offer you the elements and methodology you need to minimize wasted effort and execute the most practical and pragmatic roadmap for your digital evolution.

About the Authors

Jeremy Green has more than two decades experience conceptualizing and delivering award-winning online, mobile and ATM digital customer experiences at top 50 global banks. He has formulated and executed on omni-channel digital financial strategies and roadmaps in more than 30 countries in North, Latin & Central America, the Caribbean and the UK, building and leading customer experience design teams whose uniform, interoperable user experiences have earned plaudits from international industry publications, boosted customer satisfaction and helped grow product and transactional revenues while reducing costs.

Matt Zufelt is a digital technology executive with a 20-year track record of strong leadership in complex global environments. He has worked with financial institutions in 28 countries across North, South and Central America on crafting and executing customer-centric digital financial strategy. His experience spans technology, business, third party partners and regulatory bodies and he has worked on bank acquisitions and integrations across Latin America. Matt’s delivery of ground-breaking digital customer experience has won repeated recognition from key industry journals Global Finance Magazine, Retail Banker International and Global Telecoms Business, among others.

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