Digital Transformation in Banking: Why It Matters Now, Benefits & Challenges

Simply put, a digital transformation concerns the technology-driven changes that a banking institution undertakes both externally (customer experience, products) and internally (strategy, culture) to improve the business with cutting-edge advancements.

According to a 2021 report by Cornerstone Advisors, less than 10% of banking institutions say their digital transformation is 75 to 100% complete. And even that number is up for debate, given that the same report found that a full digital transformation in banking takes between six to eight years to accomplish, and over half of the institutions surveyed claimed to be at the same level of completion prior to 2017.

Clearly, as technologies continue to evolve, banks must retool their digital transformation strategies to keep up.

The COVID-19 pandemic provides a perfect example of this, says Gartner – 69% of banking boards of directors said that the challenges wrought by the pandemic accelerated their digital transformation timelines.

And that’s not the only pressure on traditional banking institutions. Emerging fintech firms, unencumbered by legacy core systems, can quickly embrace new tactics, keeping what works and swiftly jettisoning what doesn’t before moving onto the next iteration. Additionally, credit unions demonstrate a willingness to embrace digital transformation before traditional banks do, giving them a head start on the trial-and-error process of figuring out what works.

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One way to assess the position of banks in regards to digital transformation is by looking at their closest competitors: credit unions. Though they might serve a slightly different segment of customers, credit unions surveyed in the Cornerstone report show that the benefits of digital transformation in banking translate to increased profits.

Loan volume, loan productivity, and deposit account volume all swelled significantly in the wake of a focused digital transformation strategy.

The banks surveyed in the report, on the other hand, report the benefits of digital transformation in terms of IT and business agility, employee productivity, and customer retention. All of these areas can help to improve loan productivity, a critical business measure in bank profitability.

But loan volume, a critical component of revenue, sits near the bottom of the list. If banks can close the digital transformation gap against credit unions, they’ll boost profits in loan volume and deposit account volume, in addition to the gains they’ve already achieved.

Additionally, the benefits of digital transformation in banking extend well beyond consumer-facing products. Organizations that utilize best-in-class enterprise portfolio management solutions can transform internal processes, laying a long-term foundation for success.

Strategic dashboards, integrated roadmaps, automated processes, and more create a culture of change-embracing innovators – and emphasize that digital transformation in banking is for the organization as a whole, not just the CTO or CIO.

On the flip side are the challenges of digital transformation in banking – which are potentially costly and time-consuming.

One troublesome component is legacy systems. Most US-based banks run on core systems developed in the 1980s or 1990s. Of the banking institutions surveyed in the Cornerstone report, 72% said they wouldn’t replace their core system in pursuit of a digital transformation strategy. Yet nearly 50 % reported that their core system vendor was making little to no contribution toward digitization.

Legacy tech stacks, particularly at large banking institutions, pose complex challenges that can require years of upgrades and interventions.

Workarounds, third-party vendors, patching, and expiring maintenance contracts can all contribute to a labyrinthine system that both requires and resists digital transformation.

Most organizations have some level of tech debt – that is, the costs of reworking outdated technological systems. Tech debt appears as both principal (the costs of modernizing the current tech stack, including deferred maintenance and updates) and interest (the day-to-day frictional losses caused by working with fragile and complex systems). Paying down tech debt should be a top priority for CIOs at institutions looking for digital transformation.

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On the other hand, replacing existing systems poses its own high hurdles. A core system that’s already in place is, on some level, working – and many institutions are reluctant to start over. Additionally, transitioning to a cloud-based core requires reimagining data management and onboarding processes.

Because institutions range widely in size, there is no one-size-fits-all solution for digital transformation in banking. Fully replacing the core system, subjecting it to varying levels of transformation without replacement, or doing nothing at all could each be a viable choice, depending on the bank. Strategic modeling of each scenario, including the required investments and the potential return on those investments, can help banks measure the risks and rewards of modernizing, without accruing more tech debt in the process.

What does digital transformation look like in practice? Here are some examples of digital transformation in banking from Planview customers.

Commonwealth Bank of Australia (CBA)

Commonwealth Bank of Australia (CBA) is a multinational banking institution, with the second-largest market cap on the Australian Securities Exchange at A$1.56 billion. CBA currently invests nearly A$1 billion per year in technology spending and tracks the management and deployment of resources with Planview Enterprise One.

For more than 13,000 project managers and team leads across CBA, Planview standardized over 100 processes and controls, streamlining digital transformation and empowering users to have a “single pane of glass” overview of projects and resources.

Executive general manager Christian Eggers highlighted the “focus on innovating, solving problems and getting things done for our customers and our colleagues.”

But digital transformation in banking doesn’t stop at developing customer-facing products – CBA also uses Planview to drive internal innovation and culture shifts. Intrapreneurs, or existing employees within the company who are willing to engage in entrepreneurial ideation and risk-taking, are empowered to think strategically and submit proposals in an integrated framework.

“The democratisation of innovation is how we future fit our organisation,” said Tiziana Bianco, general manager of CBA’s innovation labs. “We need every employee to be curious, to understand customer needs and develop creative confidence. The culture of innovation that Intrapreneur champions touches all areas of our business and all employees.”

And CBA is just getting started on its digital transformation. It’s a multiyear project, which Eggers acknowledges is “still early days,” but it promises to deliver more visibility and problem solving in the years to come.

Read Next: Digital Transformation Strategy: What You Need to Know

NatWest

NatWest (formerly known as Royal Bank of Scotland) serves 19 million customers and, as an institution over 300 years old, is no stranger to weathering uncertain times. For its digital banking transformation, NatWest partnered with Planview LeanKit, the Agile Program Management and cloud-based visual work delivery module that is part of Planview’s Enterprise Agile Planning solution.

Prior to linking up with Planview, NatWest had a strong culture of ideation and plenty of driven employees, but no single solution to collect their insights. Post-It notes, whiteboard charts, and disparate email chains abounded. “We had a lot of plans while operating in a hybrid portfolio where we had Agile and Waterfall, and everything in-between. Both planning and reconciling the work was sometimes very different and very difficult,” says Kevin Meddeman, EPM transformation manager.

NatWest needed a single, collaborative environment for employees to plan and execute projects, without losing time or talent to the challenges of digital transformation in banking. That’s where Planview came in.

Instead of dictating how teams adopted the solution, NatWest’s Change Center of Excellence empowered a core group of super-users to become coaches. Once word-of-mouth recommendations and successful team experiences started spreading, organic growth exploded, and more teams signed up to transform their processes with Agile principles.

What began with a small digital transformation core of 100 to 200 users is now a collaborative community of over 5.000 employees.

“The overriding feedback, time and time again from the early adopters to our teams of teams now in departments, is that the flexibility of Planview LeanKit and its ease of use really did help with our adoption and fueled our overall growth,” says Paul Hickman, senior business analyst within NatWest’s Change Center of Excellence.

Santander UK

Santander UK, a wholly owned subsidiary of Banco Santander, serves 14.4 million customers through a wide range of channels and across multiple continents. And like other UK Banks, Santander faced huge macroeconomic uncertainties with the 2017 Brexit referendum to separate British interests from the European Union, in addition to new regulatory challenges.

To unlock their digital transformation in banking, Santander needed to ensure that its UK subsidiary could share resources, expertise, and capabilities with other Santander Group organizations. And, most importantly, it needed to happen in a single operating model that would eliminate redundancies and miscommunication.

“We wanted to create an ecosystem that would enable this organizational construct to have more agility as an enterprise, and that would allow us to connect strategy to delivery, add transparency, and simplify processes day-to-day,” says Joaquim Cols, director of operations for Santander Technology UK.

Once Santander started using Planview’s Strategic Portfolio Management solution, digital transformation happened quickly. IT processes and KPIs from several different companies were integrated under one system, and existing project portfolio management (PPM) guidelines were hybridized with Agile principles.

The resulting speed of change was staggering: “In three months, we were able to replace our former PPM Model,” Cols said. “That was a big win for us. Few people believed it was possible. We did it.”

Just as critically, Santander was able to quantify and analyze the changes with Planview’s reporting systems. “[We began to use] reporting that was based on Planview’s Strategic Portfolio Management Power BI capability that could help to bring every different layer of the organization into understanding what decisions they are making and what are the impacts,” said Cols.

And the numbers are impressive: Planview helps more than 4,000 users across five companies plan and track over 500 business initiatives, broken up into 2,500 pieces of work. Resource utilization is also on the rise: Santander reported up to 80% better-informed reallocations of investment budgets and 25% quicker decisions.

As technology continues to evolve, the future of digital transformation in banking is broadly accelerating. And as a combined 60% of bank customers primarily use either a mobile app or online portal to do business with their bank, institutions will need to prioritize digital-first initiatives to meet customers where they are.

One fast-growing frontier in the future of digital transformation in banking is AI-driven institutions, which can engage with customers on both immediate and flexible timeframes to deliver services on demand. This also enables banks to leverage sophisticated data-gathering and analyzing technologies to provide individualized customer service, as well as enabling them to make faster, better bottom-line decisions.

Another future-facing digital banking transformation on the horizon is open banking, which would essentially allow customers to own the entirety of their financial data and to easily transfer it between institutions for smoother and more holistic management of their assets. And as consumer demand for clearer data ownership grows, banks will have to adjust with solutions to access raw data and turn it into valuable financial insights.

Additionally, the future of digital transformation in banking is not immune from the growing dominance of the internet of things (IoT), which is projected to enable up to $12.6 trillion in value by 2030.

Banking has a built-in familiarity with IoT, given that it’s the industry where most consumers first interacted with the OG IoT device: the ATM, which allowed customers to connect digitally to their bank accounts through a standalone portal.

As customer appetite for micropayments, smart devices, and personalized healthcare technology increases, banks will be incentivized to respond with accessible IoT portals for them to use.

All that said – any discussion of future banking technology must acknowledge that it’s impossible to know what paradigm-shifting changes will happen in the future. But you don’t need a crystal ball if you have a strong solutions framework to analyze potential tech initiatives, prioritize funding, and understand capacity. Leveraging information effectively will allow banks undergoing digital transformation to place their bets on the strategic investments that will yield the greatest return.

Digital transformation in banking isn’t the future – it’s happening now to the industry as a whole, whether or not individual institutions embrace it. And time is of the essence when it comes to developing a digital transformation strategy, to avoid costly missteps and technological dead-ends.

Discover the seven actions you need to take to achieve optimal execution – even as you rewire strategy to delivery – with the financial services edition of our guide to delivering your digital transformation at speed. Download the ebook.