Across the globe, digital transformation is impacting almost every sector and the banking industry is no exception. Even before the Covid-19 crisis, banks faced existential challenges that demand digital solutions. The current pandemic will only exacerbate the situation.
Ask any CIO or CDO in the sector and they’ll all give you the same answer: digital is the new normal. It’s no longer a ‘nice to have’ – it’s a ‘must-have.’
The first threat comes from fintechs and start-ups that are on a mission to disrupt the status quo and are driving digital innovation as they go.
Digital challenger banks, such as Monzo and Starling, have launched consumer products that focus primarily on an intuitive user experience – with small and medium-sized businesses starting to demand similarly engaging banking services. This has led some traditional banks to fight back with their own app-only digital banking offers, such as the short-lived digital bank Bó from RBS.
Although the new entrants have a relatively small market share, they do possess certain advantages over incumbent banks. They’re often not measured by profit and loss and can afford to lose money in the short term since they’re backed by multi-year, mid-term investment plans.
The challengers are also unencumbered by entrenched legacy systems that have been in place for 20 to 30 years. This allows them to be much more agile – adapting as consumer expectations change and evolve. Nevertheless, the journey of these Neobanks from providing simple banking products (i.e. bank accounts or debit cards) to a much more complex offering (i.e. saving products, mortgages or dynamic pension plans) will require more than a user-friendly App. At some point, these new players will confront the core asset of established banks: sophisticated back office processes and systems to manage their financial exposure and capital.
High regulation and low interest rates
In the decade following the 2008 financial crash, regulations to manage risk and enhance consumer financial protection have led to a period of relative calm. But the difficulty for banks is they now need the capacity to store – and, crucially, understand – masses of data in order to stay compliant. This is a tough obstacle for an industry that is largely dependent on legacy technology and processes that are no longer fit for purpose.
Continued low interest rates are further exacerbating this problem. Indeed, one of the Bank of England’s leading policy makers has forecast the era of low interest rates will last for another 20 years. What’s more, it seems certain that the aftermath of Covid-19 will include even more pressure to maintain interest rates at historically low levels.
This means smaller profit margins for banks, leading to significantly less money available to invest in transformation programmes. In order to successfully deliver digital transformation, banks need to start thinking – and operating – differently.
Digital – the new normal
So there are plenty of reasons why banks should consider digital to be ‘the new normal’ if they hope to thrive in this difficult environment. Digitising processes front to back in a cost-effective manner – through implementing increased automation, digital entities, chatbots and data analytics to name but a few – will be essential.
NTT DATA can combine data-driven strategies and technology architectures with first-hand knowledge of the unique challenges the banking industry faces.
Together, we’re able to help bring together the disparate, siloed systems of the past into the consolidated, efficient data-lakes of the future – enabling banks to stay compliant by properly assessing individual clients and producing thorough, accurate reporting. We also provide the framework for agile, design-led processes that can compete with fintechs.
Only by fully embracing digital transformation can banks stay at the forefront of innovation and find new paths to profitability.
Contact us to learn more.