Why banks and financial institutions turn to digital transformation

The digital age brings major transformations to all areas inevitably including banking and finance. All financial institutions are now working to implement new technologies to help prioritize customer needs and improve operational processes. The global digital banking market is expected to reach $13.9 billion by 2026, and 80 million people in Europe alone will be banking online by 2023. Not surprisingly, banks are focusing on building strong digital presence.

The question is, how exactly will the digital innovation be achieved in banking? What are the technology financial institutions rely on to provide efficient and seamless online experience for their customers?

Introducing and ultimately replacing traditional banking with online banking poses new challenges, like making this virtual experience intuitive and user-friendly for customers, while ensuring maximum security and maintaining reliable Know Your Customer (KYC) procedures.

Introduction of innovative technologies is also spurred by mass introduction of smart devices and increased connectivity. Consumers no longer tolerate outdated workflows and inflexible procedures and are eager to turn to more technically savvy finance providers. The pandemic lockdowns have more evidently than ever demonstrated the need for highly functional online services.

Existing challenges in traditional finance and banking

Things aren’t going as smoothly as we would like in traditional financial services. There is a number of sore areas that banks and financial institutions are struggling with, such as:

Change in demand
Fewer and fewer people are willing to visit physical branches, displaying growing interest to online banking. This led to the closure of 2,927 U.S. bank branches in 2021.

Outdated mobile experience
Spoiled by the seamless digital experience they get from media giants like Netflix or Amazon, people now expect the same quality from banking apps. Thus, failing to comply with customers’ expectations on perfect online experience, a bank will lose a significant portion of their clientele.

Security issues
Security is a top-most priority in finance, because even quickly detected breaches can still lead to huge losses of data and money. Yet, banks reportedly lose $18.3 million annually per company to cyberattacks.

Manual error-prone processes
Banking and financial services involve tons of data processing, much of which is done manually and in some cases still on paper. Not only is this an extremely inefficient document management approach, but it is also very susceptible to human error.

New types of competition
Long-standing financial institutions and banks are now facing a great many new competitors both from fintech startups, whose number more than doubled in 2020–2022, and tech giants, like Apple and Alibaba, expanding their interest into financial sector. Given these companies are true tech experts, it isn’t surprising that they represent strong competition in digital finance.

Pandemic-related problems
No one, including financial institutions, was prepared for a Covid-19 pandemic. When people were forced to stay home, banks had to start delivering quick solutions for online customers, as well as building an efficient remote work infrastructure.

What “digital” goals should be a priority for financial institutions?

While financial companies may pursue different goals in their digital transformation, a few points hold true for every business:

• Better customer experience
• Better products and services
• Stronger security
• Operational efficiency
• Cost reduction
• Acquiring data-driven knowledge

Key technologies driving digital transformation

As of today, the digital world knows a number of advanced and already well-tested technologies that can help financial institutions achieve the above-mentioned objectives.

Big Data
Big Data is the collective term for a variety of tools and methods for processing huge, and now inevitably growing, amounts of information. It is predicted that by 2025, the daily generated data will hit 463 exabytes. It is simply impossible to analyze such amounts of information using traditional approaches.

Banking and finance process a tremendous amount of information and can employ this technology to gain valuable intel on customer behavior and demand, and to reinforce security measures, identify weaknesses in the existing workflow, etc., and ultimately make significant improvements to their processes and facilitate decision-making.

For example, Big Data has helped Danske Bank increase fraud detection accuracy by 50% since its implementation.

Cloud Computing
While Big Data helps collect the desired information, Cloud Computing addresses the matter of its secure storage. Using servers and storage facilities available via the Internet, also helps reduce costs on supporting own databases, which is quite expensive.

Cloud Computing allows for fast and easy navigation through huge data stores, eliminating the need to run local data centers and spend money on special hardware and software. Further, cloud storage is highly reliable with data backup and disaster recovery: online security improvements have been reported by 94% of companies.

Robotic Process Automation (RPA)
RPA technology enables easy creation and control of software robots that mimic human actions.

By replacing human work, RPA helps achieve two goals at once:

• Handling large volumes of standardized processes, leaving little room for error, and sparing people hours of monotonous work
• Reduces operational costs and accelerates customer service by providing quick answers to the most common problems and questions

The technology can be easily integrated with existing systems and doesn’t require much effort or resources to implement. Statistically, about 80% of financial leaders already use RPA or plan to incorporate it into their workflow.

Blockchain
Global blockchain in banking and finance is expected to reach $13 billion by 2026. So what does it have to offer?

• Significant improvement to data and document management. As a great tool for maintaining verified documents (everything that goes into blockchain stays there permanently and immutable), Blockchain eliminates the double work on re-collecting and re-certifying documents for each individual transaction, thus speeding up the workflow.
• Facilitating faster and more efficient completion of repetitive tasks, such as compliance and regulatory reporting. Smart-contracts can automate and perform these operations within a fixed amount of time, following a certain procedure, also eliminating human error.
• Greatly improved customer service with faster payments without intermediaries.
• Reduced risk of fraud and real-time authentication with digitized KYC and AML data, as well as transaction history.

Internet of Things (IoT)
An ATM machine is an early example of IoT device used in banking today. Now, financial institutions are taking a deeper dive into IoT technology, uncovering the more complex IoT features. Some banks already use Bluetooth beacons that send signals to smart devices within reach. This is used to send special offers right on customers’ smartphones or to notify bank employees when a customer with special needs comes in so they can provide prompt assistance.

Artificial Intelligence (AI)
AI has grown to be an important part of the digital transformation in banking and finance, for instance as chat-bots and virtual assistants. Chatbots don’t need to sleep and can answer customer questions 24/7 over a multi-channel communication network, leaving employees to focus on more complex tasks while saving companies tons of money with a smaller support team.

AI is also used to improve customer identification and authentication, as well as to provide personalized suggestions, and recommendations. Another advanced use of AI is its growing ability to anticipate risks, detect and prevent fraud, enhance anti-money laundering (AML) measures, and perform KYC verification.

What are the trends of digital transformation in finance?

As banks and financial institutions immerse in digital transformation, they follow the same trends as pretty much in every other industry today:

Digitization
Achieving proper digital transformation is nearly impossible without a robust Internet presence. Well-designed services and applications greatly contribute to customer satisfaction, which leads to increased customer loyalty and a long-lasting relationship with the company or bank.

Automation
Automating standardized, repetitive tasks not only helps relieve employees of a significant portion of their workload, but also reduces errors. This is where AI and RPA make a big difference.

Collaboration
To keep up with the rapid technological development, financial institutions and fintech companies form partnerships. This strategy has many advantages, such as expanding the market, creating new brands, opening up new areas of use, and increasing brand awareness.

Evolution of payment methods
As online payments grow in popularity, it is necessary to provide more efficient and reliable payment services. At the moment, the leadership belongs to PayPal, Apple Pay and Google Pay.

Better use of data
New data collection and analysis techniques, such as Big Data and AI, can completely change the quality of the company-customer relationship, as they will stimulate an in-depth approach to personalization. So it’s no surprise to see the business intelligence and analytics software market estimated to reach $18 billion in 2025.

How can you start digit-transforming your business?

To reap the full benefits of new technology, you need to focus on the following aspects of your business reorganization:

Deliver the vision
It is critical that the employees understand the value and objectives of digital transformation, so that everyone is working toward its successful implementation. But also be ready to hear out your employees’ suggestions and concerns throughout the course of the transition so you know firsthand what’s going on — they can sometimes see points of improvement invisible from the CEO chair.

Learning and training
To increase employee engagement in the digital transformation, it is very important to invest in training and education. Not only will it help employees better understand technology, but it will also reduce the stress of facing something new.

Consumer experience
Your customer is always your top priority, so make sure that the new technologies you implement are aimed precisely at improving the customer experience. Seek seamless and intuitive solutions, such as self-banking.

Invest in digital tools
To optimize business processes, automate workflows and get valuable information, you cannot avoid investing in tools such as RPA, Big Data, IoT, etc. You must create an efficient and interoperable digital workplace ensuring easy access to all databases, tools, and applications.

Upgrading existing systems and processes
If you want to achieve great results from digital transformation, simply adding new technologies is not enough. You need to re-tailor existing systems to achieve a combination of brand new and revised processes to achieve the best performance.

The future of digital transformation in banking and finance

Digital transformation essentially has already touched virtually every area of our lives, also having spread to finance. So, it is no longer possible to ignore the growth of online banking and the overall shift away from physical in-person banking to conducting transactions remotely. The digital transformation in finance will continue to gain momentum with each passing year as companies and banks adopt digital transformation trends.

While human-to-human interaction is not expected to go away any time soon (simply due to our social nature), thus keeping at least some of actual communication with customers, new digital technologies will go on optimizing all vital aspects of banking and finance, making both internal and external processes more reliable and productive.