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How Digital Transformation is Driving Change and Innovation within the Financial Industry

By Shahzada Ayub
7 min read

Digital transformation is a popular concept that companies, traditional and modern alike, are exploring to see if they could gain a sustainable competitive advantage. A business has achieved digital transformation when it adopts emerging andโ€“at timesโ€“disruptive technologies to substantially improve pre-existing processes and business activities.

In the world of finance, digital transformation seems to be a double-edged sword. As financial institutions try to go beyond their comfort zones to adopt new, emerging technologies, they are sensing both potential risks and unprecedented opportunities.

For example, while we see some Canadian banks experiencing success with blockchain, financial institutions in other regions are holding back and wait for the fog to lift. But the question is, how long can they afford to wait?

Are todayโ€™s banking institutions in a position to extend traditional apologies for service interruptions when their customers are expecting faster, more accurate, and state-of-the-art banking service? As more and more technology firms with disruptive solutions enter the financial market, traditional banks are learning that such apologies wonโ€™t sit well with a customer base that can easily choose technology firms as an alternative solution.

So, letโ€™s see exactly what challenges banking institutions are facing with digital transformation and how overcoming those can potentially result in long-term, profitable opportunities.

The Challenges

We live in times of constant technological change and the emergence of new paradigms. Today, digital transformation for financial institutions is no longer a choice, itโ€™s a necessity. As customers increasingly lean on new technologies to use non-traditional financial services, banking institutions must trigger newer and more efficient ways to manage banking business and retain customers.

Following are the key areas affecting banking service and the financial industryโ€™s competitive landscape in the days to come.

Banking on Blockchain
Like most other business models, data reconciliation sits at the heart of financial businesses. Clearly, having access to the same data at virtually the same time with an unprecedented level of confidence can transform the way banking business operates today. Yet the current operational practices exercised within traditional banks are beset with inefficiencies.

Centralization poses its own unique problems when it comes to scalability, throughput, security, and speed. The only way traditional banks could effectively deal with these problems is by embracing a digitally transformed model with a significant potential for cost and efficiency gains. Blockchain technology offers a potential solution by ensuring new levels of security, transparency, speed, and cost efficiency.

FinTech
As consumer preferences evolve and dramatic advances in technological innovations arise, financial technology (FinTech) firms are rapidly expanding and working hard to establish a strong footprint in the financial market. With a unique approach to business analysis, use of new transaction mediums, and the delivery of efficient financial services, FinTech companies are revving up to take the financial industry to a whole new level.

What this means is that traditional banks that are unable to process mobile payments, utilize digital currencies, accept online loan applications, and make use of machine-learning algorithms and data analytics are soon going to face tougher challenges.

The next phase of success for traditional banks will, therefore, be defined by their ability to quickly adjust to the changes in technology, enhance their operational practices, and explore emerging trends in the financial industry.

Customer Expectations
Customer satisfaction is a key driver of growth, but it should not be deemed as a fixed force. As technology improves and new models of financial businesses emerge to provide better service at more competitive prices, many traditional banks feel the pressure of not being able to deliver the same level of services customer expect.

Beyond enduring a barrage of customer complaints about insufficient services, there seems to be another risk these banks are likely to face: the risk of becoming irrelevant.

As the millennial generation tends to set its own expectations for how efficiently they should be receiving services, traditional banks are left with a little room to dictate their own norms and offer what they think is suitable for customers. This statement is consistent with a global survey result of 8,000 customers conducted by SaaS firm MuleSoft.

In the research, about 15 percent of millennial customers said that opening a bank account should not take longer than one hour and 47 percent thought one day as enough time frame for processing mortgage applications.

Security and Regulations
Security and regulatory requirements continue to escalate as cyberattacks against the industry increase in scope, number, and sophistication. Malicious software, malware, and phishing attempts are some of the tools used to target sensitive financial information and disrupt security infrastructures.

Traditional banks often lack IT capabilities and resources to develop powerful programs and security infrastructure. They also usually donโ€™t want to invest in costly software and/or regular upgrades. As a result, these institutions are faced with a growing number of cybersecurity challenges in the face of stifling compliance regulations.

The Opportunities

As the face of the financial industry changes, forward-thinking banks are responding to the disruptive technologies and practices by developing and expanding in-house capabilities. Others find it strategically viable to partner up with FinTechs to co-create digital offerings. Still others with strong financial power focus on acquiring their competitors.

These are all good strategies. But those waiting too long to embrace digital transformation are simply missing out on a lot of potential opportunities that could help in their struggle to raise profitability and achieve increased growth rate.

Sustainable growth and the ability to meet customersโ€™ heightened demand for security, reliability, and availability requires a whole new class of technologies. Outlined below are some of the ways financial institutions can pursue digital transformation.

โ€ข Biometrics: For authenticating customersโ€™ identities and streamlining various processes.
โ€ข Analytics: For gaining insight from usersโ€™ data and using it to deliver deeper levels of personalization.
โ€ข Omnichannel: For collecting data from a set of digital channels, organize it, and ensure its availability when needed.
โ€ข Process mining technology: For leveraging existing system data to provide transparency and actionable insight into how operational processes are actually working and can be improved.
โ€ข Blockchain: To introduce innovative practices and offer new levels of security, transparency, cost efficiency, transaction history, and more.
โ€ข System integration: To enable open banking and connecting banking systems with new platforms to simplify deployment and reduce operating costs.
โ€ข Artificial intelligence (AI): To drive cognitive AI initiatives and provide contextualized banking experience through sentiment analysis, mood assessment, customer profiling, and other techniques.
โ€ข Automation: To ensure service efficiency and free employees to focus on higher-value projects.

Digital transformation is more than just providing an online banking service or a mobile-enabled functionality. When approached strategically, digital transformation can result in true business transformation. In any case, financial businesses need to understand that to meet customer expectations, create greater organizational value, and become fully digital enterprises, they must be willing to break out of their comfort zones and rewire their organizational DNA.

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