For financial institutions, digital transformation is a long journey of reinvention. It requires countless iterations and strategy pivots in order to keep up with the fast-changing consumer demands and industry changes. Along that journey, there are many places to get tripped up.
Despite the challenges, digital transformation is a must-do for banks. Updating or enhancing outdated and manual processes—as well as delivering on-demand experiences that customers enjoy—are key to accelerating user acquisition and engagement in a marketplace that is ripe for innovation and disruption.
For an institution to ensure that their digital transformation efforts stay on the right track, here are some common pitfalls they should be aware of and avoid.
1. Playing the waiting game
Evidence shows that companies that “fix it before it breaks” gain much more from their digital transformation efforts. In a study done on large US-based companies, it was found that companies that made “pre-active” changes created more long-term value (3% increase in total shareholder return (TSR) over three years) than those that made “reactive” changes. While it may seem appealing to wait and see if there is truly a problem to fix before taking action, companies that start earlier fare much better than those that wait.
The Canadian Bank CIBC got ahead of competitors and consumer expectations by being the first in the country to offer mobile banking. They started with just brokerage and trading services in 2011, then moved into electronic deposits and a mobile business app in 2013. They also went on to be the first in Canada to offer a banking app on Apple Watch, digital account opening, mobile payments support, and the ability to replace lost or stolen cards via a mobile app.
By being ahead of the curve, CIBC was able to set the trend for others in the market. The bank has the top-rated mobile banking app in Canada and was awarded for being the best mid-market and retail bank for customer satisfaction, likelihood to recommend, and ease of doing business.
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2. Making plans that lack strategy and commitment
Since digital transformation is an ongoing and evolving process, any plans made around it must be well thought out as part of a bigger long-term strategy. To work well over time, digital transformation plans should be led by C-Suite executives with the full support of the CEO, and not just a single department within the organization. The strategy should encompass the entire organization, with leadership serving as a top-down driver of innovation.
According to the Boston Consulting Group, 86% of banks and credit unions believe digital transformation will change the competitive landscape, but only 43% have an explicitly digital strategy. They recommend financial institutions center their strategy around these four pillars:
Reinvent the consumer journey
Leverage the power of data
Redefine the operating model
Build a digital driven organization
In addition, financial institutions should consider open finance and enabling their customers to seamlessly connect with the fintech ecosystem into their long-term strategies. 9 in 10 US consumers now report using fintech apps, and 69% say that they would consider switching banks if they couldn’t connect their account to fintech apps.
Forging partnerships with data networks that enable customers to connect their accounts with any fintech app they choose should be paramount to a financial institution’s strategy. Fostering fast and secure connections to outside apps further cements their customers' reliance on the primary checking account at the center of an ecosystem of connected apps, and can increase engagement with their finances.
3. Being scared of the cloud
Digital transformation requires an organization to be agile and fail fast. With today's cloud-based technologies, it's quicker than ever to try new things to see if they work, then iterate quickly or fail fast if they don’t. However, many financial institutions are still relying on physical servers instead of the cloud.
When financial institutions use physical servers, they encounter much more sunk costs. This is especially true when scaling up usage and volume for new digital services—as they will have to continue investing in more physical data storage as they grow. Cloud computing providers such as Amazon Web Services and Microsoft Azure, on the other hand, enable organizations to scale new services and experiences quickly, with flexible data plans that can shift based on customer use.
71% of CEOs say that “improved agility and faster time to market” is a top priority. Moving to flexible cloud-based services will help them achieve this much faster than sticking with slower, more cumbersome, and more costly on-premises hosting solutions.
Accelerate your open finance journey: Empowering customers with data connectivity
4. Focusing on less impactful priorities
Digital transformation is about both iterating on existing experiences and creating brand new experiences that surprise and delight customers.
To ensure that financial institutions create digital experiences that matter to their customers, it’s important that they map them to the customer experience (CX) journey and ensure that the journey is consistent across all touchpoints (mobile, online, at the ATM, call center, and even in-branch). When the focus becomes too narrow on one aspect of the CX journey, rather than the big picture, it can lead to investing in something that doesn’t matter to most customers.
For more on ensuring that digital transformation budgets go to what truly matters to customers, check out our article on the 6 best practices for digital transformation in banking.
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5. Doing it all by themselves
At JP Morgan Chase, the annual budget for digital transformation is $11 billion. This means that they can hire all the help they need to do digital transformation internally. But for the vast majority of financial institutions, that simply isn’t the case.
Most banks are thinking about how to best manage their limited resources to deliver the value and experiences that customers crave, and the reality is that they can’t do it all on their own. Luckily for these institutions, there are multiple options for partnerships. This includes platforms (e.g. Jack Henry and Q2) that can build and maintain solutions or provide off-the-shelf solutions that institutions can integrate with.
Another partnership for financial institutions to consider is with Plaid, which can eliminate pain points from high-friction parts of the customer journey such as new account opening and funding. For example, a new banking customer can use Plaid to authenticate their outside account for funding in as little as 7 seconds—compared to hours or days with traditional authentication methods. When customers can connect their accounts quickly, they’re more likely to fund their new accounts.
When First Tech Federal Union integrated with Plaid, the friction they removed by getting new customers to connect and fund accounts faster led to an increase in the average initial account funding amount from $144 to $717.
6. Slowing down
An important factor for financial institutions to keep in mind is that change and industry disruption are a constant, ongoing process, which means that digital transformation never really ends. When a financial institution starts to slow their efforts is when they’re most vulnerable to disruption, no matter how much they’ve already achieved.
To stay competitive and serve their customers’ evolving needs with innovation, financial institutions should adopt continuous digital transformation. That means that digital transformation is not a one-and-done action, but an evolving journey that changes with their customers, the market, and the times.