We’ve discussed the business rationale and the underlying requirements for increasing your chances of success. Now, in the third post of this series, we’re looking at the five most common challenges banks face when making the switch to digital
Change is always a challenge for any company, and making the switch involves change in many different fields. But if you understand what the big issues are, you can take the necessary remedial action to reduce the headaches and smooth your path to digitalisation.
Those five big challenges are:
1. Your current technology.
You’ve heard this before, but that doesn’t make it any less true. For most banks, legacy infrastructure is the biggest hurdle to overcome. This is technology that has been built up bit by bit over time – to the point where it has becomes what Valentina Kristensen, director of growth and communications at Oaknorth describes as spaghetti infrastructure. You’ve got siloes for customer information, silos for individual operations, silos for different channels, and – almost certainly – siloed thinking behind them. These stitched-together platforms don’t play well with Open APIs or data persisting through the organisation.
This is the diametric opposite of the agile, nimble digital bank that customers want. It’s also a pretty expensive way just to hold on to yesterday’s status quo: complex, old-fashioned architecture absorbs disproportionate amounts of maintenance budget.
None of which makes the thought of replacement any easier. The good news is that replacement may not be the right thing to do. There are options available. And implementing a flexible digital banking platform on top of a traditional core system could be the most effective way forward.
2. A world of distraction.
Customers are using an ever-increasing number of channels. They still like branch transactions, but they also want mobile banking for convenience. They are reluctant to abandon the traditional bank completely, but they are prepared to experiment with alternatives. Banks are competing with a multitude of different specialist – but narrowly focused providers – but most want to remain universal providers themselves.
Taking all competitors out with one all-encompassing digital transformation project is not a realistic proposition (and it doesn’t fit with today’s agile approaches to IT and development). Nor is developing a digital culture across every segment of your business.
Instead, banks should consider a basket of complementary strategies to make the changes needed. Develop an overarching vision that ensures that these strategies are implemented by the right people at the right time and for the right reasons. Identify the low-hanging fruit. Pick your cherries carefully. Prioritise your goals and targets. Most importantly, have the flexibility to change so that you stay relevant in a fast-paced environment
3. Institutions vs. Innovators.
In the new digitalisation environment, banks will inevitably find themselves working with fintechs and other non-traditional players. Each relationship will be unique. But common to almost all will be a language barrier or, in some cases, a full-blown culture war.
The digital future brings together two opposing cultures. ‘Move fast and break things’ doesn’t work in traditional financial circles, but is central to many exciting fintechs. Large banks are risk averse by design with powerful built-in incentives to limit risks, whereas digital-first innovators are founded on agile principles that can move with the times. Institutions work to the twentieth century model of production-line distribution. Innovators adopt the ‘release now, refine later’ mentality of digital warriors.
These different priorities reflect different ways of thinking. As shown in the 2018 Fintech Disruptors report, when asked about priorities and opportunities of working with banks, fintechs attached far less importance to mobile and automation and digitisation than banks did when asked the same question. For fintechs, these are a straightforward fact of life – not separate areas of focus.
The risk-averse culture has served banks well. But it can also prevent real progress. It can also lead to different types of existential risk in the new environment. Merging the veto culture and the fail-fast culture is key to making the digital switch. More than ever, an open mind and open channels of communication are essential.
4. Keeping customers on board.
Those cultural differences also show up in the types of customers institutions and innovators attract. Innovators’ customers have, inevitably, embraced digital delivery. Traditional bank customers may need some convincing. But whereas innovators often focus on one type of customer, banks have to providers to a much more diverse group with different needs and different preferences for engagement.
Single-minded focus on one group of customers may alienate another. Developing universal digital services for individual account-holders may hobble efforts to deliver in-demand digital services to more lucrative corporates. And customers that experience transformation in one area of their banking may wonder why another remains slow and unresponsive. As PwC’s analysts point out in their Digital Banking Consumer Survey of 2017: “For a bank to deliver against its customers’ needs, it now needs very sophisticated analytics and personalisation capabilities.”
5. Identifying success.
Traditionally, project managers set clear milestones and goals, so everyone involved can recognise success when they see it.
In the digital landscape it can be a little more complicated and success can often be a moving target. Milestones can shift as the environment evolves and original targets can be pushed out of sight. Regulatory changes – like GDPR and PSD2 – can also move the goalposts, as can new technologies.
Maintaining enthusiasm and momentum when the goal is less ‘mission accomplished’ and more ‘constant innovation’ is a tough but necessary task. The good news for banks is that there is plenty of insight to be had from digital-first fintechs who are more accustomed to this way of working.
In other words, working with partners is essential. That means, finding the right ones is of paramount importance – which is why it will be the subject of our next post in this series.
To learn more about how banks can make the switch to digital banking, read our "making the switch" white paper.