Best Approaches for Digital Transformation in banking and financial institution
Banking firms are taking a different route in digital transformation and digital business growth. Companies are segmented into five approaches, and CIOs are playing the crucial role to support transformation. There is a need for clarity on what operational strategies are needed to support each.
Digital Transformation is clarity and organizational discipline
‘Going Digital’ has become the top priority of banks across India since 2019 (see Gartner report on banking 2019). The challenge for CIOs is that reaching the digital transformation benchmark means a lot of different things. We can identify two main strategic approaches among banking and financial services companies:
- Digital Optimization
The banking institutions following this approach are primarily attempting to optimize the current business model, products, processes and customer experience. But, this does not change the overall value proposition. CIOs as a consequence implement technologies like robotic process automation (RPA) to improve internal productivity by reducing costs and improving operational efficiency.
2.Digital Business Transformation
The focus of business and IT leaders following this approach is much more strategic than the digital optimization approach. Using this approach, the banking and financial institutions can introduce new business and IT capabilities which are the foundation for a new, completely robust, digital business model. This digital strategy approach leads to fundamentally different banking or insurance value propositions with new operating models. Many CIOs have started working on implementations of technologies like artificial intelligence (AI), biometric authentication and blockchain etc.
In reality, the banks and financial institutions exhibit a multitude of strategies and tactics towards digital transformation, which leads them to distinction in customer service or models within the digital transformation landscape. We must understand that digital transformation affects the entire organization from internal talent to culture, as well as approach to innovation.
The two main issues in the industry are (as identified by Gartner in 2018)
- Way to create organization value (approach to business models and IT strategies)
- Operations (adoption to emerging technologies and approach for digital transformation)
Five Digital clusters for financial organizations
Because banking and financial organizations are taking different approaches to create value and structure in their digital landscape, it is clear that there is no one path for digital transformation. But, a combination of different approaches will yield strategies that are more conducive to optimization and transformation.
By understanding the priorities set by the banking and financial institutions in digital transformation, there are four different organizational characteristics we can summarize and place them in five digital clusters. Each of the clusters represents the group of financial services organizations that display similar approaches to digital transformation through their value creation and IT-based strategies.
The five clusters are:
1.Traditional business
Companies that pursue traditional business model strategy, have a conservative IT strategy and plan to maintain current value preposition. 26% of banks across the globe belong to this segment
2.Early-stage digital
These sets of organizations are hiring an in-house digital transformation team and are working with some external vendors in order to adapt to new technologies. But they are in a very early stage of transformation.
3.Digital fast follower
These companies take calculated risks in embracing new technologies or optimization. However, they do not pioneer or bow out of the current value proposition. A quarter percentile of banks and financial institutions belong to this category
4.Digital Innovator
These organizations are very versatile in adapting to changes in the digital transformation landscape. They are primarily focused on responding to market forces rather than creating disruption through digital transformation initiatives.
5.Digital transformer
These organizations are the most mature in their digital transformation journey and are usually business savvy. They tend to seize new business growth from digital investments.
Trends in Digital Transformation for Banking and financial sector
Even if there are ’n’ number of variations in the approaches taken in digital transformation by the banking and financial industry, there are a number of trends that can be presented in the study. These clusters do not represent the phases in digital evolution but showcase companies who are innovating to meet the needs of their customers. These companies are investing in people at a higher rate than those companies who are yet adopting approaches. Connected platforms are one of the most sought after approaches for innovation.
Data maturity is a characteristic of companies which are in transformation — like traditional business, early-stage digital and digital fast followers. Companies in these clusters are more focused on governance, while digital innovators and transformers are driving more value.
Market Disruption is an often goal, but only companies which are in the digital transformer cluster can achieve this. This acts as a key market value driver.
Budget rise is taken by companies which are transforming, rather than just optimizing. Those banking and financial companies which are placed in digital innovator, digital transformer and digital fast-follower indicate this as a trend. Even in other clusters, that is early-stage are showcasing rising budgets.
Product Innovation approaches vary from cluster to cluster. Companies in early stages focus on alignment of products while digital innovators turn out to be the first adopter. However, in any organization, their focus has toned from core focus technology to platform.
Innovation Specific Programs are less in terms of traditional businesses and early-stage digital companies, which are primarily driven by compliance factors and declining business factors. If companies in either of these clusters do have innovation capability they tend to look for innovation internally, compared to peers in other clusters who are slightly outward looking.
It is important to understand that optimization and transformation do not go hand-in-hand. Digital transformation is a process that occurs throughout the organization and optimization occurs at a particular product or service division. The functional differences in the traditional banking cluster at the employee level show lower levels of strategic synergy in those financial institutions. Conversely, to become the digital innovator requirement is of very close alignment across functional areas, reflecting strategic focus on organizational culture for that group.
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