What are the top technological challenges and opportunities for banks nowadays?

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Changing times call on banks to take bold action to transform, to make the most of evolving technologies, stay ahead of new competitors and meet new customer demands. But can they really push forward with innovation and transformation, while improving cost efficiency at the same time? This is the dilemma for the world’s banks in the last years. The imperative to transform is growing ever stronger, but profits are weak — experiencing its lowest growth in a decade.

Why do banks really need innovation?

Over several decades, banks have continually adapted the latest technology innovations to redefine how customers interact with them. Banks introduced ATMs in the 1960s and electronic, card-based payments in the ’70s. The 2000s saw broad adoption of 24/7 online banking, followed by the spread of mobile-based “banking on the go” in the 2010s. The new era of data can lead to higher automation and, when deployed after controlling for risks, can often improve upon human decision making in terms of both speed and accuracy.

Meet clients’ expectations
With no doubt, the interruption of COVID-19 defined our new normal, accelerating the digital transformation that was not fully tackled during the previous years. No matter what their generation is, users are already used to log in their bank applications and manage all their transactional and informational activities — though traditional channels remain relevant for complex or advisory services. The expectations focus on creating a personalised experience culture that nurtures client needs, and builds trust. Banks that invest in the customer experience trends have higher rates of recommendation, greater wallet share, and are more likely to up-sell or cross-sell products and services to existing customers.

Meanwhile, advancing technology and reforms, such as open banking, have expanded the financial options on offers and customers are turning to a broader range of providers. These new digital experience leaders continuously raise the bar on personalisation, to the point where they sometimes anticipate customer needs before the customer is even aware of them, and offer highly-tailored services at the right time, through the right channel.

Anticipate change and stay ahead of the new competition
Several trends in digital engagement have accelerated during the COVID-19 pandemic, and big-tech companies are looking to enter financial services as the next adjacency. And this new competition is squeezing bank margins. Fintech companies benefit from an absence of legacy systems, which allows them to invest in the latest technology and customer experiences, rather than just keep existing systems ticking over. In March 2022, Apple announced the acquisition of Credit Kudos, a fintech startup based in UK. Some hypothesis for this move include Apple’s move into payments technology and products such as buy now, pay later (BNPL). To compete successfully and thrive, banks need to adopt new technologies as the foundation for new value propositions.

Boost efficiency and cost control
The concept of the classic retail bank branch seems to be obsolete, becoming more and more evident during last years. Clients prefer interacting with their bank’s app rather than spending several hours in a brick-and-mortar bank for simple operations. Reducing the number of retail locations and investing in customer experience branches seem to be the most obvious move from banks but, what about the back office? New technologies are increasing operational efficiency with the automation of manual tasks and the replacement of human decisions by advanced diagnostic engines in diverse areas of bank operations. If implemented right, banks can enjoy the speed and agility that today characterise digital-native companies, like fintech startups. Banks will be able to prototype new products or solutions quickly, launch new features in days or weeks instead of several months. Banks can collaborate extensively with partners to deliver new value propositions integrated seamlessly across journeys, technology platforms, and data sets. Since building that infrastructure requires several stakeholders’ buy-in, it provides a great opportunity to solve one of the identified banks’ key challenges: unify the technology strategy that is tightly aligned to business strategy.

What are the main obstacles to achieve success?

  1. IT systems
    Most banks have not upgraded the old IT systems as soon as they should — using very old programming languages and building technological solutions on top of old architecture that was not envisioned to tackle nowadays challenges. The result: core banking systems often do not run in real time and some services are not connected between each other. This is ver limiting as customers demand applications and services built around real-time offerings and capabilities. In addition, the maintenance of the systems often turns out to be very expensive, difficult and not too flexible to guarantee a smooth transition into new products or platforms. Because of that, unless market forces you, it is difficult to operate on an agile way in order to prototype quickly, improve user experience or make workflows more efficient.
  2. Siloed data
    Banks gather large volumes of customer data — any personal, behavioural, psychological or demographic data gathered throughout the customer journey. With each touchpoint, each department may be collecting different data points that are relevant to them and their operations. But not every department collects everything, and here lies the problem. When data ownership systems are not well designed, information starts to become incomplete, inaccurate, outdated and, as a result, not credible. Why is this a problem? Departments make decisions with the information they have available. When they only have access to the data available in their department, they will make more mistakes, miss opportunities to increase efficiency, as well as contributing to the business’ common goal. As a result to the end customer, among others, it will translate into bad customer experience. How many of us had to repeat or re-explain a problem to different representatives across the business? Nowadays, clients expect all their information to be available to the entire organisation.
  3. Multiple Stakeholders
    This is a common problem across all organisations, but it may be accentuated with siloed data and several systems living in the same ecosystem. When ownership is not clearly defined, decisions about products, data, systems or processes tend to turn into chaos and confusion. As an example, when a teams needs to report results about the business and different departments, criteria can be very different because each stakeholder initially defined their data and processes with no common framework. Whom do you trust then? Moreover, not all departments may be allocating the same amount of resources on technology, even using a completely different technology set-up between them — that means, some of them could be using advanced Excel workbooks to manage all their business with simple functionality, others may be using Python to design and automate their processes, or they may rely on other holistic software solutions like SAP. In order to achieve a greater agility, cost optimisation and customer satisfaction, banks need to start coordinating their systems and their teams when possible to reduce internal friction.

What do banks need to do?

Nowadays, a large part of the population don’t fully trust on traditional banking and is not satisfied with the relationship they have established. Therefore, banks need to focus on the the basics — giving both personal and business customers a positive experience that meets their needs and on an environment they are comfortable with — a digital ecosystem. Banks must shift from the traditional “product-push” approach to one focused on helping customers achieve their wider ambitions, i.e. preparing for big life events, such as weddings or buying a home.

The first step is to break down departmental silos and enhance collaboration among the organisation. Once ownership has clearly been identified and set up, banks can start defining all the technological architecture, decide which platform you will use as your single-source of truth as well as designing and document all data procedures that can be utilised by all departments.

With a more centralised approach, banks can become more profitable, deliver more added value and experience higher customer loyalty and retention. For example, deliver unique and personalised experiences to each customer across their journey. Or quickly reacting to a complaint will be able to quickly recognise who the customer is, what past interactions were made, what was purchased, which marketing initiatives he/she was part of and whom he/she has previously spoken to — a common problem in other industries too that is usually tackled with the implementation of CRM tools.