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23rd of November 2017

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Digital transformation framework: How to turn the tables on fintechs?

Why do banks need a digital transformation framework?

According to McKinsey, global banking revenues totalled 4.6 trillion in 2016, up 3 per cent from 2015:

If the market is growing, why do banks need to change?

Apparently, these general figures won’t tell you the whole story:

·         For the first time since the subprime crisis, industry growth has slowed down to just 3 per cent year to year (down from 6 per cent in 2015).·         Banking revenues in the EU and the US are nearly flat, gaining only around 1 per cent.·         Margins are narrowing while the costs are on the rise. As a result, return on equity is only 8.6 per cent globally (compared to 9.6 per cent in 2015.

As market slows down and profits erode, not all companies within the financial ecosystem are ready to withstand these changing conditions. Three major groups of enterprises seem to have the edge here:

1.       The disruptors (fintechs) will become an even greater threat once they gain more financial power.2.       The global banks invest heavily into digital technologies.3.       The tech giants like Google, Amazon, Apple, Facebook, Alibaba.

The vast majority of community banks have no distinct advantages over their competitors, according to American Banker.

Here’s the N-iX comparative score for various players within the global financial ecosystem:

How should regional and community banks plan a sound digital transformation campaign without spending hundreds of thousands of dollars on the advisory services?

FIX digital transformation framework can be a good start.

FIX digital transformation framework

This framework is fairly simply and digital transformation that focuses on the community and regional banks, credit unions, as well as other small financial service companies.

It follows this assumption:

The real change occurs when a company aligns its digital capabilities with the business strategy. This requires a shift away from a transaction-based model to building services around decent customer experiences.

FIX business transformation framework addresses all three parts of the equation:

Form+Innovation=Xperience

1. Form

When you put these two figures together, it’s easy to understand why management commitment is a vital component of the successful digital transformation.

Successful change is impossible without top management leadership. Here are the key features of the Form block:

The change without clear objectives is meaningless:

·         Set clear objectives and the roadmap of the digitisation campaign.·         Keep the strategy as simple as possible. After all, every real-life transformation is nuanced, so don’t overplan.·         Target key aspects of the strategy that bring the highest value and keep minor issues in the backlog.·         Create agile cross-functional teams to break down silos and facilitate a shift in mentality.·         Track progress and pivot when it makes sense, but always focus on the key objectives of the campaign.·         Design services around customers, not transactions. For instance, if online onboarding is a critical feature for your customers, find a way to deliver that functionality.

Successful digital transformation is mostly about the vision and the strategy, not about technological expertise. Fill technological gaps with the solutions providers. Here are some of the key points:

·         Have the right people inside an organisation to lead the process, e.g. CTO and customer experience manager.·         Establish strategic cooperation with one or several digital vendors.·         Establish cross-functional teams where bank’s employees engage in deep cooperation with vendor’s engineers.·         Use digital solutions that rely on the open-source components.

1.3 Commitment

Only 33 per cent of the C-Suites are truly committed to digital transformation initiatives and only around 20 per cent of digital transformations succeed.

It takes genuine management commitment to combat resistance to change and transform a legacy business into a truly digital enterprise:

·         The top management has to be fully supportive of the transformation.·         C-Suite commitment ensures the credibility of the transformational efforts.·         Clear communication is essential to keep employees informed about the upcoming and ongoing changes.

2. Innovation

A meaningful data strategy is vital for any financial services organisation:

·         Design systems that will harvest, store and distribute data easily within the organisation.

·         Consider cloud adoption for supporting business tasks and complex computations.

·         A banking app is a great source of data that can be translated into business insights.

API-based architecture eases the adoption of any existing and future solutions. APIs keep the whole structure under control, as the system gets more and more complicated.

Process automation greatly enhances customer experience, reduces branch variable costs, and frees up employees to focus on the activities that bring the highest value. Here are some of the examples of automation in banking:

·         Automated user interactions.·         Complex calculations and modelling.·         Machine learning and AI that automate big-volume computations.·         Computerised routine tasks of the employees.

3. Xperience

Mobile platforms are still largely overlooked by businesses across different industries. For instance, we talked about weak performance of banking apps in this post. At the same time, decent mobile experience is what millennials desire and other demographic groups are eagerly adopting.

Mobile channels generate huge revenues, just look at global mobile payments. This segment has shown an astonishing growth in the recent years. Annual mobile payments are to top one trillion dollars by 2019. This would account for more than 50 per cent of the total payments market (a forecast by McKinsey).

Mobile platforms gain significance when it comes to onboarding and personalised marketing. Hand-held devices are to become one of the major revenue drivers in the next three to five years.

Here are some of the focus areas:

·         Offer basic mobile transactions via mobile.·         Focus on simplicity, speed, and great UX to create decent customer experiences.·         Expand functionality with the services most critical for the users.·         Reduce branch labour costs by automating many consumer interactions with a mobile app.·         Implement full-cycle mobile onboarding.

Technology allows turning raw data into valuable insights. Analyse collected data to personalise user experiences and drive business decisions.

Business intelligence, data science, machine learning, and deep learning are readily available for the banking industry. Big banks are already taking advantage of these technologies and there is no reason why smaller incumbents can’t follow.

Advances in machine learning greatly reduced the cost of the sophisticated data analytics. It just takes a competent vendor to integrate these tools.

Here are some of the ways a bank can use analytics to cut costs and increase revenues:

·         Use data science and machine learning to extract valuable business insights at a lower cost.·         Process app usage data to optimise digital experiences.·         Discover bottlenecks in business operations to cut expenditures.

An API-based architecture allows smooth integration with almost any fintech software. Start with a few fintech solutions and add functionality in later iterations.

When it comes to functionality, here are some of the obvious choices within a strategic transformation framework:

·         Cashless and contactless payments (Mobile wallets, PayPass, etc.);·         Cashback and reward programs;·         Mobile money transfers.

Digital transformation and corporate culture

The real objective of the strategic transformation is to reset the corporate culture, and to build an organisation that nurtures strategic alignment of business goals and technological capabilities. To build an organisation, hungry for digital innovations that add business value.

Embracing such culture will help small banks to easily identify and seamlessly integrate any new technology. FIX framework is one of the tools that will help adopt such corporate culture. Still, it’s always up to the people and their determination to make such a dramatic shift.

You can also find a shorter version of the FIX digital transformation framework in this presentation.

Konstantin Didur, marketing manager at N-iX LLCImage source: Shutterstock/Wichy

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