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Innovate, Operate, Engage: Defining Digital Transformation in Retail Banking

Digital innovation disrupts banking, and traditional banks are yielding precedence to online branches. However, the real challenge is not adopting new technologies but espousing digital culture.

Retail banking faces challenges from everywhere in these trying times. Unlikely to grow, low interest rates seriously impact banks’ revenue streams in Europe and the US. Innovations are reshaping the payments landscape, and fintech startups and challenger banks are proliferating, leading to increased competitive pressures and more sophisticated customer demands.

For any retail bank to endure this transformative period, it has to modernize its tactics and embrace technology. Replacing legacy systems alone isn’t enough; stepping on the digital transformation path marks a fundamental disruption of the banking business model, culture, and relationships with the customer.

Top 10 banks by assets
Digital transformation for banks marks a fundamental disruption of the business model, culture, and customer relationships

Bank Executives Are Ambivalent About Digital Transformation

Digital adoption provides tremendous potential for banks to improve efficiency, optimize processes, and increase customer convenience with innovation, among other benefits. Some of the world’s largest banking institutions are already embracing enterprise software development to tap these values.

Investment budgets for digital transformation

While the banking sector has traditionally been resistant to change, the pandemic implications coupled with a fierce competition from fintechs forced banks to accelerate digital transformation.

When digital transformation is done right, it’s like a caterpillar turning into a butterfly, but when done wrong, all you have is a really fast caterpillar.
George Westerman, Principal Research Scientist, MIT Sloan Initiative on the Digital Economy

The Three Pillars of Digital Transformation in Banking

If digital is poised to become mainstream, what is holding banks back, especially in the retail sector, from accommodating the trend? Among the top banking digital transformation concerns are cyber security and data privacy risks, followed by the high cost and complexity of technology migration and a skills shortage.

While banks shouldn’t neglect these challenges, they have to look to their IT departments now to seize the opportunities for revenue growth. As it happens with any transformation, digital evolution in banking also asks for a firm comprehensive strategy. To build it, banks and financial institutions should focus on three pivotal elements:

  • Redesigning customer journey
  • Building a robust partner ecosystem
  • Investing in enabling technologies

Let’s examine each of them closely.

3 pillars of digital transformation in banking are customer journey redesign, a fintech partnership ecosystem, and enabling technologies

Reinventing Customer Experience

If banks cannot truly be customer intimate, they are doomed to be just dumb commodities, acting behind the scenes, like utilities.
JP Nicols, Bank Innovators Council

Banking is changing faster than ever before, and so are its customers. Traditionally, they used to have long-term relationships with their banks. Sometimes this was built on loyalty, but mostly it resulted from inertia and the difficulty of switching banks, which allowed banks to stay complacent and concentrate on pushing products with little regard to the segmentation of their customer base. By perpetuating such an approach in the current customer-centric reality, banks run a risk of losing customers and falling into oblivion.

Considering consumers’ fast-changing attitudes, delivering exceptional customer experience is no longer something that can be put on the back burner. Customers want the ease of use, simplicity, and responsiveness. Not getting these, they are quite likely to switch the provider despite the perceived complexity of the process.

Historically, high fees and low deposit gains have always been the main reasons for considering a provider switch. However, with increasing rates of digitization, the quality and convenience of mobile and online banking services have become almost equally important for consumers.

Protection of data is most important in decision to switch providers

Banks Perplexed by Customer Centricity

Understanding the individualized needs of customers and raising the bar for customer support is of key importance to any bank’s success. Unfortunately, as borne out by the PwC statistics on banking customer centricity, while alignment of services with customer expectations is a critical growth driver for most banks, the majority of banking institutions are not yet ready with their customer-centric models:

  • 61% of bank executives describe a customer-centric model as ‘very important’
  • 75% of banks are making investments in customer-centric services
  • 17% of banks feel their customer-centric business models are mature
what retail banking customers expect

Research shows that modern customers demand an Amazon-like banking experience, i.e. intuitive, quick, smooth, and easily accessible. They want to log onto their personalized account, quickly search for what’s relevant for them, take advantage of highly personalized cues, review the basket, pay, and provide feedback. As the following numbers suggest, banks still have a long way to go to bridge the gap with consumer brands:

Banks vs favorite brands

Optimizing the Customer Journey Across All Customer Touchpoints

Finance website abandon rates exceed 75%. The score is so high because lengthy forms, impertinent questions, and cryptic jargon so typical of banking deter visitors and dissuade them from engaging with a website or application. That’s why reducing customer effort at each step of interaction with a bank across all digital channels is conditional to closing sales. Every customer journey is a new business process; it should be refined by removing all unnecessary exchanges, business rules, and hand-offs from the course.

Think of opening a new account and all elements involved in the process. In some cases, it may seem extraordinary how much waste has crept into this basic banking activity—legal and technical stumbling blocks, long application forms, the confusing account offers, visiting a branch to finalize all the forms. Now, examine every single process in your bank from the end customer perspective and determine how you can simplify each of them for the user.

Start from customer journey mapping:

  • Use research to define all customer personas that interact with your bank.
  • Identify buyers’ goals and pain points and analyze how your current digital services reflect on them.
  • Match all digital touchpoints of your customer visits with the relevant stage of their journey.
  • For every process in your bank, map out all the steps that a customer needs to take before they purchase a given product or service.
  • For each step, think about how you can simplify it for your customers, to make their journey as easy and enjoyable as possible.
  • After each implementation of a new feature, measure results and collect feedback. Then repair and repeat.
Benefits of customer journey mapping

Consider BBVA’s service Bconomy, a personalized banking plug-in that examines user income and spending and benchmarks them against those of people with similar demographics. Using a very simple and intuitive tool, the bank provides customers with a relevant, comprehensive, real-time analysis of their finances and creates personalized recommendations. Another example is Bank of America’s AI chatbot, Erica, which supports customers with simple activities like transaction search, money transfer, or basic advice on products and services. These are examples of unsophisticated digital products that deliver superior customer experience.

Creating Contextualized Experiences Based on Data

The goal of contextualization in banking services is to leverage detailed contextual data about every user to blur the lines between consumer experience and digital banking services.

By collecting and incorporating contextual information using big data, machine learning, and AI technologies, banks can continuously evolve, offering and maximizing relevance based on an individual’s location, demographics, past purchases, and other vital information.

Inspiring a Customer-Centric Culture in Your Organization

Customer-centricity is about "putting the voice of the customer at the center of everything we do” (Miguel Uccelli, CEO and Country Head of Scotiabank Peru). It’s an approach that fosters positive customer experience at every step of customer engagement with a bank. When done right, it optimizes lead conversion, nurtures customer loyalty, and drives repeat business.

Banks can build long-lasting, meaningful relationships with their customers by making customer-centricity the core value not as a one-off effort, but an ongoing, clearly articulated transformative process that penetrates every tissue of their organization. Instead of reactively responding to customers’ feedback, banking institutions can leverage digital tooling to anticipate customers’ behaviors and expectations and redesign services from their perspective, ensuring omnichannel access in the most convenient way.

Forging Strategic Partnerships

By partnering with fintech startups, banks will give their account holders the right measure of security and speed. Account holders can know that their money is safe, and they can enjoy the latest financial technology. This is the way to become a digital bank.
Chris Skinner, Financial Services Club

New fintech software solutions are cropping up every day. The common perception is that they are giant-killers, created to bring about the demise of banking as we know it. While there are plenty of fintechs and direct banks that operate in traditional payment and savings spaces, there are also many newcomers out there who are niche players and intend to stay that way. What is more, the niche they fill may be a market gap, like blockchain, and the services they offer can be a disruptive alternative to traditional offerings in areas such as business lending.

For those reasons, traditional banks that perceive fintech partnerships as an opportunity rather than a threat are accelerating their digital transformation. They are reaching out to innovation-driven startups to modernize their backend and frontend processes, products, and operations. Those partnerships allow banks to develop new kinds of services, reaching beyond traditional banking offering. These may be personalized shopping and lifestyle tips, concierge services, or purchase-related resources.

Reinvent your customer experience
with innovative tech

Why Banks and Fintech Need Each Other

A general bank (one that offers both corporate and retail services) needs a huge workforce for many areas of the business that are not customer-facing. Like in all businesses that have many bases to cover, some of this work is managed competently while some business units just scrape by, as no company can be excellent in everything it does.

Normally, if a product, service, or business unit is struggling, the parent company will discontinue its efforts in that area, if they can. Banks are not so fortunate, because they have onerous administrative work that they cannot dispose of. Most of this work is in the governance, risk, and compliance areas (GRC). While some banks have no problems with compliance, most banks are less than competent in risk management, which may result in heavy fines. According to Fenegro, enforcement actions against financial institutions totaled $5.4 billion in 2021.

Enter the fintech category that fixes all that: RegTech. These are companies that focus on risk and threat detection and report to the necessary authorities on disciplines ranging from Sarbanes-Oxley to Basel III. These fintechs offer a huge opportunity for banks to unbundle much of their GRC infrastructure and outsource it to these specialist companies.

RegTech is a growing trend, and will probably be the norm in a decade or so (if there will be still any banks around). ClauseMatch, Privitar, and ComplyAdvantage are among the leaders of the pack, with investment and usage by leading banks such as Barclays, HSBC, and RailsBank. Related services, such as cyber security and identity management, are also classed as RegTechs.

RegTech is what can help banks to avert some of the regulatory fines, expected to hit $400 billion by 2020

Beyond RegTechs

Other niche fintechs offer services that banks value, such as data analytics, mobile payments, and credit management. While banks, in general, have mature data analytics in their traditional data management, their ability to apply AI and machine learning to unstructured data is not always enough to beat the competition, and they make use of fintechs who have an expert and focused team of data analysts and data scientists.

Top bank partnership areas

There are also quite a few fintechs that are disrupting the space of traditional credit management companies such as TransUnion and Experian. For instance, Lenddo operates mainly in the Indian market, offering a new approach to credit management in Asia. US contender CreditKarma serves consumers by giving them free and extensive access to their credit ratings, thus benefiting both the consumers and the lenders.

In terms of support for other services, we can also name a few interesting examples. Vietnamese intermediary payment service provider Payoo recently secured Citi Bank’s backing in a strategic partnership to facilitate consumer-to-business collections. Another instance comes from the collaboration between Barclays and MarketInvoice, an invoice finance solution, aimed at easier, quicker, and safer invoicing for B2B Barclays customers.

Finally, numerous banking projects are surfacing that cultivate mutually beneficial partnerships with fintechs, such as BNP Paribas’ mobile platform OpenUp connecting innovative fintech startups with the bank to consider potential collaboration. Similar initiatives prove that banks and fintechs are coming closer together, and emerging technologies are enabling their convergence.

Investing in Digital Technologies

The challenge for banks isn’t becoming “digital”—it’s providing value that is perceived to be in line with the cost—or better yet, providing value that consumers are comfortable paying for.
Ron Shevlin, Cornerstone Advisors

Finally, we reach the last critical component of digital transformation in banking—enabling technologies. It is possibly the trickiest part, as, on the one hand, IT spending in banks and financial institutions is expected to grow by 6.1% in 2022 to $623 billion worldwide (Gartner), and on the other hand, those organizations still lag with innovation.

While most banks understand that investing in digital transformation is the only way forward, they are hamstrung by aging legacy systems and have to resort to bolting mobile apps and online banking onto their complex and siloed back-office applications. This is a short-term fix; this outdated architecture has to go and be replaced by a new open digital platform.

Whether or not a bank has moved or is moving to a digital model, all of them recognize technologies that they will need to introduce in the next few years if they want to remain competitive and relevant. Here are the most critical of them.

Banks need to seek out blockchain, AI and cloud as their enabling technologies for digital transformation


Blockchain is fast, tamperproof, democratic and has the potential to change the world as radically as the internet. Blockchain-based technologies are gaining traction, yet the resistance to their adoption in banking is palpable. According to Deloitte, 73% of bank executives fear that their organizations will lose competitive advantage if they fail to adopt blockchain.

That’s because bank executives see the use of blockchain as both a threat and an opportunity. The threat lies in blockchain's ability to disintermediate every player who was making some profit from handling a transaction. The opportunity can be found in major cost savings when using blockchain for convoluted and complex transactions, such as trading.

Blockchain is getting lukewarm responses from retail banks, in particular. They quote consumer resistance as the main reason for their skepticism and claim that retail customers are not ready to accept blockchain on a large scale. Regulatory uncertainty and lack of standards for blockchain transactions are also of concern for these organizations. Still, they are tempted by the numerous applications of blockchain in retail banking, such as processing remittance payments, fraud prevention, or credit score verification.

Top blockchain use cases among FIs

Artificial Intelligence

AI is forcing its way to the top of the list for digital adoption in banking. This is hardly surprising, considering that the collective potential cost savings for banks from AI applications are estimated to reach $447 billion by 2023 (Business Insider).

However, most institutions still have a long way to go before they can realize the business benefit of data and convert it into business intelligence. First, the walls should be broken down between all the data silos common to most banks. They are usually product-based: mortgages, credit cards, and vehicle finance each have their view of the customer, which probably differs from the customer data for the checking account. Second, data quality should be addressed, together with a comprehensive data cleansing exercise to result in a single view of the customer. Once this is done, the linking of social and mobile data can occur, enabling the bank to build a personalized view of the customer.

Once the data is trusted, different AI solutions can be considered to extract value. Banks are using AI in a number of ways to streamline operations and to make the customer interface leaner and more responsive.

Some examples of the use of AI in banking include:

  • Pattern detection in identifying and preventing fraud
  • Robotic ‘personalities’, like HSBC's Olivia in the UK, with relatives Andrew (UK commercial banking), Erica (Bank of America), and Amy (Hong Kong Banking).
  • Automation of backend processes to save time and costs. A US banking company achieved a 90% reduction in time needed to fix failed trades by using AI and machine learning.

Cloud Solutions

Cloud is one of the biggest trends propelling service agility in the banking sector. With 83% of FIs already deploying cloud technology as part of their primary computing infrastructures (Google), cloud should be considered a core technology for digital transformation in banking.

Cloud migration benefits for banks

Cloud solutions available as software-as-a-service or platform-as-a-service models can help banking institutions simplify and standardize their IT infrastructures, improve cost management, and provide analytic tools indispensable for delivery of detailed customer insights. As a business asset, the cloud provides banks with the opportunity to expand their reach, introduce new services, and become more agile. Especially retail banks see value in the flexibility, scale, and security delivered by cloud computing, and use these benefits to engage customers in meaningful interactions and go to market faster with new offers.

One of the many beneficiaries of cloud solutions in banking is LiveBank, a virtual branch banking platform that teamed up with Microsoft to offer its customers, a network of global banks, access to a catalog of cloud solutions. On the retailers’ end, the Reserve Bank of India adopted a suite of cloud solutions to drive communication and improve collaboration among its personnel and provide better services to their customers.

Both examples subscribe to a common trend of using the cloud to improve current systems and enhance services rather than using it as the basis for fundamental, core transformation. Banks move some applications to the cloud, migrate selected functions to SaaS, and re-architect applications to be more agile and automated. Perhaps this flexibility and ease of implementation make cloud one of the most popular enablers of digital transformation in banking.


Digital transformation can be as daunting as any radical shift. The sooner banks overcome the fear of technology and develop strategies to onboard new technologies and services, the quicker they will reap the rewards of digitization and position themselves for success.

Digitizing a company’s existing processes, systems, and assets doesn’t have to be an overwhelming task. Take a realistic, objective look at your situation, identify gaps and areas for improvement, and start from crafting strategies for the above three pillars of digital transformation.

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