Here’s the big reason why most of the big IT services companies are still struggling to accelerate: Many large banks have got into a do-it-yourself mode for their IT. Where once they outsourced work, they are now choosing to do more of it in-house, mostly in their own global inhouse centres (GICs) in countries like India.
Peter Bendor-Samuel, CEO of IT research & consulting firm Everest Group, said the Indian players have been living in denial. “They have all been forecasting good years in banking and we have been telling them that for many reasons this was unlikely to happen. The banks’ GICs have matured and they are clearly growing them at the expense of third parties. For some functions, they are also bringing work back on-shore and this work they are keeping in-house. They have largely decided that they like the big Indian firms as their legacy (partners to maintain their traditional IT),” he said.
Banks are increasingly adopting automation, cognitive/AI, analytics and blockchain, but too many banks mistake digital projects (mostly in the front-office) for digital transformation
Everest Group reports that 85 percent of banks have digital transformation implementation as a priority for 2018, driven by the need to find efficient ways to address challenges in the industry such as cost pressures, eroding top lines, uncertainty and instability in the geopolitical environment and decreasing customer satisfaction. Unfortunately, in the rush to find digital solutions, many banks are mistaking digital projects for digital transformation.
According to Everest Group, 81 percent of banks are implementing digital projects focused primarily on their front-offices; only the remaining 19 percent are actually going for true transformation by optimizing and integrating their front-, middle- and back-office operations.
“Those 81 percent of banks who have only invested in front-end application of digital technology are engaging in what we call ‘digital washing’—claiming transformation achievements when they are in fact far, far away from true transformation,” said Manu Aggarwal, practice director at Everest Group. “True digital transformation requires connecting the dots between the front-, middle-, and back-office processes to achieve key business objectives. Moreover, it is not an isolated implementation of technology. Rather, it’s an ongoing process where changes in technology and alignment to goals need to be continuously checked.”
In examining the digital transformation strategies within the banking industry, Everest Group identified the following trends:
Strengthening competitive position, building market share, acquiring and retaining customers, and generating cost savings are some of the major factors for adopting digital technologies.
Market facing front-office processes lead the demand for adoption of digital services, mainly targeting customer experience.
Some of the key levers of digital adoption include Automation, cognitive computing and artificial intelligence (AI), analytics, and blockchain.
While the adoption for automation, AI and analytics is primarily driven by lending, retail banking, and cards and payments, most activity in blockchain is happening on the commercial banking side.
Disruptive forces – open banking regulations, growing FinTech ecosystems, and increasing demand for a seamless customer experience – are forcing banks to make significant investments in digital technologies.
To effectively compete, banks must move away from being perceived as physical structures that offer financial services/products to an ambient fabric that connects people and businesses. They must transition from a transactional, product-centric approach to an intelligence-oriented customer-centric model centered around customers’ journeys. Artificial Intelligence (AI), API-enabled open banking architecture, and cloud are fast-becoming the foundations of banks’ IT architecture.
In order to evaluate and measure how organizations are faring in their leverage of digital technologies, Everest Group several years ago developed the Digital Effectiveness Assessment model.
On the Capability maturity axis, we measure organizations’ presence on all digital platforms, the quality of their mobile apps and online banking capabilities, their activity on various social media channels, their self-service innovations, and their open banking capabilities. On the Business outcomes axis, we measure their digital prowess using parameters including customers’ digital channel adoption, the customer experience (based on mobile app ratings, website optimization, and engagement), brand perception, and financial performance.
Earlier this year, we used the model to determine the European digital banking leaders. And from a field of the top 20 banks in Europe, we identified seven: Barclays, BBVA, BNP Paribas, HSBC, KBC Group, Lloyds, and Société Générale. These financial institutions have achieved:
Superior financial performance: 17 percent higher growth in deposits, and 3 percent advantage in efficiency ratio in 2017
Superior customer experience: Higher penetration of digital and social channels (e.g., up to 75 percent of BNP Paribas’ retail customers are using mobile app and online banking channels), mobile-based advisory capabilities, and personalized products and services. These leaders’ mobile application ratings are 7 percent higher than the other banks we evaluated.
Stronger customer engagement: A superior user interface (UI), feature-packed mobile apps (e.g., BBVA offers 80 percent of the mobile features evaluated) and online banking platforms, self-service technologies across branch/ATM network (e.g., Barclays offers card-less cash withdrawal, bill payments, and check deposits through ATMs), and meaningful social media content.
Higher business growth: Wider adoption of digital banking channels, superior efficiency ratios, adoption of an open banking ecosystem, and innovative product offerings, particularly through the wider set of APIs they offer.
These leaders have re-designed their customer journey to adapt to external disruptions by:
Calibrating current customer satisfaction: Formulating a unique customer engagement model based on insights gained on each customer’s digital readiness and adoption.
Benchmarking current digital maturity with best-in-class enterprises: Evaluating their digital channel maturity and customer satisfaction scores against best-in-class peers, and then tailoring their digital strategy to bridge the gap in their organization’s vision of the customer experience.
Redesigning the customer experience: Incorporating human-centric design principles to address customers’ stated and unstated requirements and desires.
Optimizing their channel strategy: Developing a comprehensive channel strategy to drive customer adoption and acquisition, and changing the business model to deliver digital experiences.
Innovative product offerings: Offering personal finance management features through digital channels that are intuitive and simple for users. Other services include payments through multiple messaging and social media channels, and intelligent voice-based payment solutions.
Everest Group recently conducted a study with 55 banking and financial services firms to evaluate their digital capabilities in areas including strategy, organization and talent, process transformation, technology adoption, and innovation. Here are the primary insights we collected from that study.
Investments in Digital Technologies are Increasing
More than 60 percent of BFS firms have invested in exploring the various use cases in cognitive- and AI-driven technologies. Typical use cases include helpdesk automation using chatbots and other cognitive capabilities for functions such as sales & marketing, data entry, credit assessment, and information gathering.
The AI Transformation Wave is Hitting the Front-Office
BFS companies are increasingly leveraging AI-enabled transformation in areas where there is significant customer interaction. So personal finance virtual agents, voice assistants for account servicing, voice-based payments and account authentication, and intelligent message-based account servicing are gaining traction. Not surprisingly, Millennials and a new breed of mass affluent (per The Financial Brand, this segment generates up to 70 percent of banks’ and credit unions’ total retail profits, even though they only make up less than 30 percent of the customer base) are extensively using these solutions for advisory and servicing assistance.
BFS Firms are Increasingly Emphasizing Their “Change” Agenda
Our study indicates that BFS firms will increase their digital investments by 9 percent in 2018. This is particularly driven by the need to change in response to the evolving regulatory regime, and customer demand for responsive and agile applications. For example, in the U.S., deregulation could pave the way to a shift in the utility space. In the U.K., the Second Payment Services Directive (PSD 2) has heralded an open banking revolution that forces banks to release their data in a secure and standardized format.
The Talent Gap is a Key Challenge for Digital Adoption
Although BFS firms are accelerating their adoption of AI-driven applications, they’re facing significant scaling challenges as digital talent is scarce and in high demand. The biggest talent shortage areas include cybersecurity experts to handle stringent regulatory pushes – such as GDPR in the EU – and those with deep knowledge of big data, without which enterprises can’t realize their full potential in enhancing the technical and functional capabilities of their internal teams on leading big data platforms.
To stay ahead of the competition and remain relevant in the market, BFS firms must invest in enhancing the five following capabilities in alignment with their digital journey:
Strategy – Outline a clear vision, metrics, and realistic goals for focused and scalable digital adoption
Organization and talent – Acquire digital talent through reskilling and retraining existing employees, as well as recruiting talent from outside
Technology adoption – Adopt niche digital technologies at speed and scale with higher focus on AI, analytics, security, and risk
Innovation – Continually source new ideas for innovation, and embed human-centric design in the organization’s DNA
Process reimagination – Transform and automate internal business processes to remove inefficiencies.
The above recommendations translate to a customer-focused triple mandate of Experience, Efficiency, and Ecosystems (E3) for banks. The evolution from a product-centric to a customer-centric mindset requires an open banking ecosystem to orchestrate the lifestyle services that individuals or enterprises demand from their financial institutions at speed and scale
This metamorphosis will be challenging not only because of the complicated regulatory regimes and resilient legacy structures, but also the rise of non-traditional competitors.