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Already in 2019, experts announced that financial institutions will have to prepare for a new reality – a world where customers seek competitive digital solutions. A couple of years later – after one big healthcare crisis and a time of unprecedented digitization – this statement is more meaningful than ever.
With the rise of innovative FinTech enterprises, offering seamless, convenient alternatives to classic banking solutions, the landscape is forever changed. Tighter margins, stronger competition, and increasingly stringent regulatory policies are some of its major new elements.
So, to analyze these changes in more detail – in this entry, we’re going to discuss all the ins and outs of the digital transformation in the world of financial services.
Digital Finance Transformation - What Is It?
Regardless of the industry in question, digital transformation is the process wherein a company embraces new digital solutions to open up new benefits or eliminate older problems.
Correspondingly, digital transformation in financial services involves introducing digitalization and technology to create certain benefits and advantages – both for clients and the organization.
As for now, one of the main challenges that especially bigger and older financial companies must face is, surprisingly, not the integration of modern systems itself but closing the gap between classical operations (banking from the “past”) and the “new world” of finance, as driven by changing customer needs (the previous idea of “having the money” is being replaced by the need of “using the money”).
Why Does the Financial Sector Need Digital Transformation?
Financial institutions are among the most critical service providers in every society. In the wake of previously unimaginable digitization, it would be somewhat odd if such a crucial pillar would stay behind in the changing world.
Furthermore, with the global digitalization of the banking industry, new technologies are no longer seized as ‘just’ a chance of gaining the upper hand. They’ve become something of a standard that banks must comply with. This can prove challenging, especially to older institutions which now have to evolve into this new, modern form if they want to remain competitive.
Digital disruptions in the banking sector
As OECD points out, the financial sector has been the object of many innovations in recent years, with significant impact on consumers and on regulation. Banks have had to adapt their business models to deal with persistently low interest rates, low credit growth, and increasing competition in retail from FinTech and platform-based competitors, all which threaten the profitability of traditional banks.
The stereotypical idea of a bank — elegant people sitting behind desks and stamping documents — is becoming history. For instance – last year, the majority of all financial operations in the UK has been done via an app.
As the evolution continues to spread successfully, introducing modern technologies and software delivery methodologies like DevOps, Agile, Lean and Continuous Delivery, traditional banks have seen parts of their core business overtaken digital competitors. The advantage held by FinTechs is that they can use state-of-the-art technology, operate a leaner business, and focus on those business segments with higher returns.
Key areas of digital transformation in banking
Among the most important digital transformation trends at financial institutions are technologies like Robotic Process Automation (RPA), Cloud Computing, and the use of Big Data and Blockchain.
However, amidst all of these technologies, in our opinion, no solution has ever been as critical as the ongoing introduction of AI.
While AI might seem new, it’s actually just the latest in a long digital trend. The transformation of financial institutions kicked off around 15 years ago, when market leaders embraced new digital channels — and with them more effective product selling and a wider customer reach. In a sense, banks stopped being simply money keepers and givers; they became something completely different (something more!) — a type of technological service.
As for now, one of the main challenges that especially bigger and older financial companies must face is, surprisingly, not the integration of modern systems itself but closing the gap between classical operations (banking from the “past”) and the “new world” of finance, as driven by changing customer needs (the previous idea of “having the money” is being replaced by the need of “using the money”).
Trends in digital transformation for financial services
In our opinion, there are three main directions that influence the technological trends in the world of finance: customer experience, operational efficiency, and ROI.
Customer Experience
Digital transformation can enable financial companies to improve their customer experience in many ways—from attracting new customers to simplifying banking.
According to BDO – during this process, customer centricity, or a clear focus on meeting customers’ needs, is key. Improving customer experience is 83 percent of financial executives’ top long-term business goal and one of their top three short-term goals (74 percent). Over a fourth (28 percent) cite poor customer experience as their biggest digital threat—significantly higher than all organizations at 17 percent.
A significant factor in improving customer experience is introducing new products and services, cited by 80 percent of financial services companies as one of their top long-term goals. This often includes a blend of enhanced FinTech offerings (often developed through partnerships, collaborations, and joint ventures with start-ups, innovation hubs, and accelerators) and more traditional offerings.
Operational Efficiency
As mentioned, tighter margins, stronger competition, and increasingly stringent regulatory policies are a fact in the landscape of financial services.
As BDO points out, optimizing business efficiencies and operations across the supply chain is a top digital priority for financial service providers (cited by 37 percent). 82% percent also list reducing operational inefficiency as one of their main long-term goals, and 76 percent point to it as one of their top three short-term goals.
Thus, financial services companies are more concerned about their IT infrastructure’s capacity to integrate advanced technologies than those in other industries. The majority (61 percent) cite their IT system as “fair or poor,” compared to 31 percent of all organizations. Only 39 percent say it’s “excellent” or “very good” (vs. 63 percent of all organizations).
ROI
Unsurprisingly, most organizations anticipate a high return on revenue from their digital transformation.
Every element of the new landscape we've listed so far plays a key role in achieving this.
The SAP Center for Business Insights and Oxford Economics reported that 80% of organizations that have completed a digital transformation also increased their profits. What’s more, 85% said that the transformation has influenced their market share. Finally, on average, decision-makers expected a 23% higher revenue growth than competitors because of the transformation.
These increased profits don’t only result from the cost optimization we’ve mentioned earlier. Companies can also maximize their opportunities with a more data-driven approach. Finally, they can also benefit from the digital culture, which improves best practices and enables them to capitalize on areas like trend evaluation or pattern recognition.
The role of IT in the financial sector
Currently, mobile banking services – like accessing a bank account or paying with the use of a smartphone, without a physical debit card – are a natural part of our daily lives. With the advancing digitization, even more technological functionalities will replace traditional banking parts. Thus, the role of IT in the financial sector will only grow more important.
Plan Your Own Digital Transformation
DX provides an unparallel potential to advance and improve your entire business. Starting from upgrading internal operations and delivering better experiences to end-to-end users, it has the power to transform enterprises and drive substantial revenue streams.
And the longer you wait with starting your digital transformation, the more benefits can keep slipping through your fingers.
Maybe it’s worth considering your options today?