The payments and banking industry in the United States has long had a reputation for lagging behind other countries. Consider how long it took for pin and chip cards to become available in the states, or the relatively low penetration of alternative banks like Revolut, Monzo and N1.
But this is starting to change.
And as fintech and digital banking become more popular in the US market, large legacy institutions are realizing that this isn’t a space they can ignore if they want to stay competitive.
Traditional banks are now starting to offer new banking services to compete with fintechs.
Banking Digital Transformation
Most major US banks are running their core operations on platforms that were first developed in the 1980s and 90s. After decades of updates, patches, and fixes, these systems may not bear much resemblance to the original programs, but still contain large amounts of legacy code and outdated architecture that makes both maintaining and updating them an enormous, costly headache for institutions.
However, institutions also delayed complete overhauls both because of the large investment this would require, and because of the huge complexity and sensitivity of the financial system that responsible actors minimize their operational risk. Discarding an existing system and replacing it with a new one can cause disruptions.
But as legacy systems continue to age, and agile startups introduce fast, modern consumer fintech products, banks are increasingly finding they have no choice but to modernize.
Fortunately, this is no longer so difficult as it was even a few years ago. Advances in technology have made it much easier for banks to redesign their core functionalities, or offer more users friendly features that integrate smoothly with existing systems. In other words either re-platforming or refactoring
Re-platform: Re-platforming is less of an undertaking than re-factoring. It entails comparatively minor adjustments that don’t alter the core functionality or require new skill sets to implement. This includes things like version upgrades or database updates. The data strategy in this case will be of low complexity.
Re-factor: Refactoring is updating the codebase without changing baseline behavior. This results in improved readability, easier maintenance, greater flexibility and cloud-readiness. This approach often requires more complex data operations.
Determining which option to choose can be a challenge. So there are several factors that an organization should consider before launching a digital transformation. The first thing to do is take a look at the existing customer journey.
Mapping The Customer Journey
For banks, the customer journey is essentially any series of steps or actions the customer must complete in order to successfully conduct a specific interaction with the bank. As a general rule, the more seamless and easy these are, the better.
Especially for organizations who have not yet put serious efforts into banking digital transformation, odds are an analysis of customer journeys will reveal multiple areas where efficiencies can be generated by digitization.
Lloyd’s Bank for example, recently launched an Alexa integration that allows customers to access their account information with a voice command.
According to a recent McKinsey study, banks have seen a 30% increase in digital engagement compared to the pre COVID-19 period, putting us well on our way to a complete retail banking transformation.
“The shift to remote brought about the COVID-19 pandemic has impacted every industry, and banking is no exception. Even as restrictions lift, we are seeing indications that there may have been a permanent shift in consumer tastes, with a preference for remote banking as opposed to in branch visits. This makes digital transformation all the more imperative for financial institutions who have yet to take the plunge.”
— Vlad Medvedovsky, Founder and CEO at Proxet (ex - Rails Reactor), a software development solutions company
AI and Big Data
Data is the key to any successful digital transformation. And the first steps that an organization takes along the digital route, such as releasing a basic app, will greatly increase the amount of data its customers generate.
While you can never have too much data, it’s also only helpful in conjunction with the right frameworks and tools for processing it. Without these, analytics teams can quickly become overwhelmed, resulting in decision paralysis.
Luckily, we are starting to see a change in banking. Organizations are realizing they should invest in strong data governance practices, advanced analytics and machine learning before they embark on their digital transformation journey, and not after the fact.
In many instances, this means leveraging cloud analytics, storage and computing. Historically, financial institutions have been hesitant to use the cloud out of concerns about security, governance and regulatory compliance. However, for organizations that need to accurately analyze large amounts of data, it's simply a necessity.
The insights that can be generated by cloud computing are well worth the effort it takes to implement. Just one example of many, cloud analytics can analyze transaction patterns, and make recommendations to customers that will improve their financial performance based on their transaction history.
Real Innovation Examples
Lloyds Banking Group invested £4 billion in digital transformation from 2018-2020: This process has gained the institution as many as 17.4 million digital users, a 30% increase compared to the pre digital transformation period . Lloyd’s also implemented cloud computing, allowing the company to reduce the time it takes to create new features by 30%. Lloyd’s plans to continue its digital transformation and launch even more new bank products.
The second-largest bank in the Netherlands introduced RPA technology to streamline coronavirus-related loan modifications. The RPA-bot has saved Rabobank an estimated 50,000 working hours, and the figure is still increasing.
Bank of America
The third on our list of banking transformation examples, Bank of America’s customers deposited around 160 million checks using the company’s new mobile app. They also introduced an AI-driven virtual assistant, Erica, which has handled more than 230 million requests to date, making the digital experience smoother and better for customers.
Digital Transformation: Digital Banking Strategy
When implementing a digital transformation, it can sometimes be difficult to know where to begin offering innovation in banking services. Let’s take a look at some of the most popular consumer facing features you can implement to help your customers have a smoother experience.
Digital Account Opening
The single most important feature your bank must have is the option for customers to open an account digitally. In 2021, having to drive all the way to the bank, wait in line, spend 45 minutes speaking with a branch representative just to open an account is more than antiquated.
Pre-Covid, this one area where fintechs and startups were completely blowing traditional banks out of the water, with more and more consumers opting for new digital banks in large part due to how easy it was to open accounts. And, now that legacy institutions no longer have a monopoly on FDIC insurance, consumers really have nothing to lose by opting for the easier, more efficient option.
But as the COVID-19 pandemic forced organizations across industries to go remote, banks have started to catch up with startups.
According to a Cornerstone Advisors’s report, as much as 30% of banks anticipate choosing a new system this year, up from 22% in 2020.
Commercial digital account opening systems are gaining in popularity among credit unions, as well. In 2021—2x more credit unions introduced digital accounts than had done so in the past three years.
Application Programming Interfaces (APIs)
Roughly one in four institutions planning new investments in APIs in 2021
At the start of the year, only 30% of banks had deployed APIs, but that’s still a 10% increase compared to 2020.
APIs are key to enabling banks to integrate with 3rd-party products, which is essential for those who don’t want to develop every single new digital feature in house. Being able to integrate fast increases competitiveness.
There are some interactions that clients want to have with banks that simply cant be handled entirely by AI assistants or video tools. This one area where video chatting can help. Customers can still get personalized attention, but remotely.
According to the same Cornerstone survey, one in four financial institutions are planning to develop this technology in 2021.
It’s another indication that many of the shifts to remote we saw during the pandemic may be here to stay.
Person-to-Person (P2P) Payments
P2P payments have been growing in recent years, and until recently were very much the purview of apps like Venmo (arguably, Venmo played the biggest role in popularizing consumer fintech in the United States)
In 2021, about a quarter of banks and a fifth of credit unions plan to implement P2P payment tools. This is actually a bit of a decrease compared to the previous two years, which means that this trend was well underway before the outbreak of the pandemic.
Zelle is one of the popular solutions in this area for US banks, , with approximately 500 institutions currently using it as their P2P tool. In 2020 Zelle reported a transaction volume of $133 billion.
By the end of 2020, 40% of banks reported that they had implemented cloud computing.
This has shifted over the past few years, from initial hesitancy to institutions realizing that cloud computing has become an absolute necessity.
This also resulted in interesting knock-on effects in the tech industry. Vendors who do IT in banking are now faced with the task not of convincing banks of the virtues of cloud-computing as such. But rather, why their particular cloud solution offers the best value.
Finding a Digital Transformation Partner
Whatever the scale of your organization’s digital overhaul, choosing the right technology partner is essential to its success.
Proxet, we have over a decade of experience of finding and developing custom software solutions for financial institutions. If you are looking for a technical partner to guide you through your digital transformation, please get in touch.
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