6 best practices for digital transformation in banking

Digital transformation is necessary for financial institutions to stay competitive. These best practices help ensure that they make the right investments.

February 01, 2022

Tom Sullivan Pic
Tom Sullivan

Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.

Many think digital transformation is about creating new digital products and services, but there’s much more to it than that. For financial institutions, digital transformation is about shifting the focus to the customer experience (CX) journey.

In today’s financial landscape, digital services such as online banking portals and mobile apps are table stakes. Financial institutions stand out in two ways. First, by creating consistency across all channels (web, mobile, call center, and in-branch), also known as the omnichannel customer experience. Second, by knowing their customers so well that they can create innovative and personalized products based on their actual needs. 

By mapping out the CX journey across each touchpoint, banks can gain a deeper understanding of how they can leverage new technologies and data to create better, more personalized experiences. A financial journey could go from account opening to card issuance, then lending later on. Throughout this journey, there will be multiple touchpoints via online, mobile, in-branch, and over the phone. 

One caveat of this is the shift to digital. Fintech mass adoption has arrived, as 88% of US adults now use it. Because of this, consumers are likely to compare their experience with their bank against their experience using fintech apps. While this doesn’t mean that the in-person banking experience is no longer important, it does mean that banking customers expect to do most, if not all, of their banking activities through digital channels only. 

Digital transformation happens on multiple fronts

While the customer-facing touchpoints set the stage for digital transformation, internal processes are equally important on the back end. In fact, internal systems and processes are often where banks can get bogged down the most. Without smooth systems and processes powering the front-end solutions, a consistent omnichannel experience isn’t possible. 

Digital transformation on the back-end can include eliminating data silos by connecting disparate data systems and moving from paper and in-person processes to automated and digital ones. It also can include implementing new technologies such as AI, machine learning, and cloud-based systems in a way that makes sense for improving both the CX journey and the bank’s bottom line. 

Best practices for digital transformation in banking 

Digital transformation can take many different shapes. However, there are certain best practices that financial institutions can follow to help ensure that digital transformation efforts pay off with better customer experience, long-lasting brand loyalty, and a positive impact on the bottom line. 

Here are six digital transformation best practices for financial institutions to implement in order to effectively heighten the customer experience across all channels. 

1. Eliminate customer friction points 

With attention spans in the US averaging eight seconds, friction throughout the customer journey can lead to drop-offs and create motivation for customers to find a new financial service provider. Finding and eliminating friction in traditionally slow areas can yield excellent results for banks. 

For the use case of new account opening and funding, there is a lot of room to remove friction from the process. For example, traditional account verification methods that customers go through to fund new accounts, such as microdeposits or manual verification via voided check, can take several days to complete. By contrast, newer methods such as instant account verification can verify and connect accounts for funding in a matter of seconds. By cutting down the friction involved in the onboarding process, banks can see impactful results such as higher conversion rates, reduced drop-off, and more funded accounts. 

Digital-first bank Chime partnered with Plaid to remove friction from the new account opening process. After integrating with Plaid and enabling new customers to verify and connect accounts for funding in seconds, rather than days, they quickly saw results. Customers who connected with Plaid were 3.2x more likely to fund their accounts and spent 5x more money within their first 12 months on the platform than those using traditional account validation methods. 

Traditional account validation methods create much more friction than newer account validation methods like instant account verification.

2. Personalize wherever possible

When considering what areas will make the most impact on customers, personalization is king. According to BCG, for every $100 billion in assets a financial institution has, $300 million in revenue growth can be achieved by personalizing customer interactions. To create personalized experiences that deliver an impact, banks must leverage their existing customer data to create relevant, customized offers and experiences throughout the CX journey.  

Using customer-permissioned data such as transaction history, balances, liabilities, etc., financial institutions can make personalized recommendations (also known as ‘next best offers’) for things like loans, debt consolidation, savings and investment tips, and more. These personalized recommendations can be offered at the most relevant times. For example, if a customer carries a high credit card balance, a bank could recommend lower interest debt consolidation loans that would allow them to save money over time. 

Additionally, customer-permissioned financial data can be leveraged to create personal financial management tools that give users deeper insights on areas like growing wealth and paying off debt. Personalized insights into their own finances will motivate customers to engage more frequently with their financial institutions, as they now have a bigger reason to continue logging in to an online banking portal or mobile banking app. This higher engagement will further cement the bank account as the ‘primary source’ for their customers’ financial lives. 

Erica, Bank of America’s virtual financial assistant, offers personalized insights through the bank’s mobile app. With tools that include spending snapshots, viewing balances across all accounts, refund confirmation, recurring charges monitoring, and bill reminders, Erica is a prime example of how a bank can use their customers’ financial data to create personalized insights that make a difference in their lives.

Erica provides useful personalized insights that keep Bank of America customers engaged with the app.

3. Learn from leaders and disruptors in all industries

In the not-so-distant past, consumers may have expected a little less convenience and speed from their banks. In today’s world of instant gratification through on-demand digital services, that expectation has gone out the window as 73% of consumers say that an experience with a single organization alters their expectations for every other organization they interact with. 

Most consumers use only a small number of banks in their lifetime. More often, they're using services in other industries, and that’s what they’ve gotten used to. For financial institutions, looking to tech innovators such as Google, Amazon, and Netflix for inspiration may be just as (if not more) useful as looking at other banks. 

For example, big tech is already making a big splash in financial services with products like Apple Card, which offers a differentiated experience through a credit card that lives on your iPhone, has no fees, and has built-in tools that help customers pay less interest. Financial institutions can look to products like Apple Card for inspiration for their own digital transformation, as they come from the paramount of innovation, technology, and revolutionary customer experiences. 

Financial institutions should improve data access infrastructure

Learn to meet the scale of consumer demand and future proof data access

4. End data silos

People want to be able to use their financial data how they see fit, when they want to use it. If their data is ‘locked’ in a siloed banking system that doesn’t allow them to easily connect with outside financial apps and services, they may get frustrated and look for another banking option that offers more financial freedom and flexibility. In fact, 69% of Americans would consider switching banks if their primary account could not connect to outside financial accounts. 

In fact, quick access to relevant financial data is one of the most important aspects of digital transformation. It enables the new services, apps, and experiences that keep customers engaged. When this data exists in a siloed system—such as within an application that no one outside of a certain department has access to—it can’t be used to help power digital transformation.

One way for financial institutions to unlock siloed data is to invest in centralized data-linking systems. These systems pull different types of financial data (e.g. transactions history, assets, liabilities) that live in disparate systems into one centralized database. Once it’s in the centralized database, the data can be used in other areas where it adds value—such as a personal financial management tool or lending recommendations. 

For example, digital bank Chime used a centralized data-linking system called Snowflake to link 14 disparate types of data into one system. This allowed them to build more personalized customer experiences through more effective use of customer financial data.

5. Get connected with APIs

Permissioned access to financial data is necessary for creating new banking products and services, and application program interfaces (APIs) are like a key that unlocks that much-needed data. In banking, APIs provide a safe way to exchange financial data between financial accounts and both internal and external applications. This safe connection makes it easier to create solutions for multiple use cases, such as new account funding, personal financial management, wealth management, loan verification, and others. 

In addition to being safe, APIs provide access to financial data in real-time. For example, if a bank is using an API to retrieve the financial data on various liabilities and assets for a customer who is applying for a loan, they can instantly see everything they need to make a decision, such as investment holdings and loan balances. Traditional methods of getting this information are much slower, and often require the customer to find and share that information themselves. APIs provide a faster, easier, and safer way to get more accurate financial data. 

Some banks have internal APIs, but they aren’t available to 3rd parties that host new, innovative financial apps and services that their customers want to use. By creating external APIs, banks create a safer way for their customers to utilize their financial data as they see fit—as well as help themselves partner with vendors who can build new apps and services. Plaid Exchange is an open finance API platform that makes it easy for banks to implement safe external APIs, and help their customers do more with their financial data. 

APIs also allow financial institutions to have more control over what data is shared. By restricting API access to only what is necessary to enable a financial service, financial institutions are more easily able to stay in compliance with regulations like Europe’s Payment Services Directive 2 (PSD2). 

6. Build perpetual transformation capabilities

Banks that are ready for change are more likely to thrive through it, which is why digital transformation should be seen as an evolving, non-stop process with perpetual improvement built-in. 

As a result of the COVID-19 pandemic, many banks became aware of the need to perpetually be assessing customer needs and their ability to respond to crises. 44% of banks are now implementing measures to improve their information systems, such as analytics, forecasting, and changing risk models. This will help them build more accurate customer personas and improve personalized offerings in a way that shifts with the times. 

One clear way for banks to ensure a perpetual transformation is by adopting a product mindset, which we discuss in more detail in our article on 7 steps for digital transformation in banking. Adopting a product mindset means treating the business like a product that needs to be continually perfected and improved over time. This includes tracking key performance metrics, aiming to solve specific problems for a target audience, and iterating to improve impact and results over time.

The goal: seamless financial experiences

For financial institutions, digital transformation is about matching their customers' experiences with the seamless digital experiences they have in their everyday lives. To make banking experiences as frictionless and personalized as social media, e-commerce, or streaming entertainment is the ultimate end goal. 

With disruption from new technologies and startups as an ongoing factor in the financial industry, financial institutions must incorporate digital transformation strategies and best practices to ensure that they stay relevant. Creating new experiences that customers love across the entire CX journey is a sure way for financial institutions to retain and gain customers in an industry that is subject to constant change. 

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