Digital Transformation in Banking

digital transformation in banking

Today, the paradigm shift in technological advancements has reshaped the global era of digitization. In this digital era, technology is continuously driving change in almost every industry. From the use of smartphones to bringing automation to improve operations, enabling cloud computing to facilitate collaboration and the data analysis for extracting insights, smart use of technology has become an integral part of our day-to-day lives.

Digital transformation is an outcome of such a technological revolution and is far beyond just moving from conventional banks to digital banking. Digital transformation in banking is an essential change in how banks and other financial institutions learn about, interact with, and satisfy customers’ needs. To be more precise, an efficient digital transformation begins with understanding digital customer behavior, preferences, choices, likes, dislikes, stated and unstated requirements.

The article will shed light on how different technologies are giving a face-lift in streamlining processes of the banking industry. Emerging technologies like AI, Blockchain, Cloud Computing, IoT, RPA and AR/VR are rapidly harnessing to enrich the existing financial landscape and extending their reach to untapped fields. The article aims at answering the following questions, introspecting the scope, factors and tech-trends driving the digital transformation in the banking industry.

  1. What is digital transformation in banking?
  2. Which factors drive the digital transformation in banking?
  3. Which technologies can contribute to the digital transformation in the banking industry?

What is Digital Transformation in Banking?

Digital transformation in banking refers to the integration of technologies to meet the changing banking requirements. The integration leads to fundamental changes in how the financial institutes operate and deliver value to their customers.

The main objective is to enhance banking operations and customer relations by updating the systems, digitizing processes, improvising culture, and data security. Banks that undertake this transformation can expect reduced costs and streamlined processes. The digital transformation in banking provides a more hassle-free and engaging customer experience through digital solutions and applications.

Digital transformation offers the following benefits to financial institutions:

  • Analysis and risk management for banking operations
    A fraud detection system and multi-level validation of transactions eliminate possible mistakes of the customers and banking staff.
  • Speedy operation lowers transaction times
    Big Data processing systems with microservice-based architecture allow quick and safe transaction processing.
  • Data handling with enhanced security
    Data encryption techniques save banks from fraudulent cases of external and internal information leakage to hackers. Moreover, the transactions are securely executed.
  • Predictive capabilities
    Prior understanding of problems that are probable to occur in the future is a key to your financial success. The trusted information on different scenarios to a global economic crisis will help you prepare in advance. Hence, you can make the right business decisions and integrate winning Fintech solutions before switching your enterprises to another more promising and financially rewarding industry.

Which factors drive the digital transformation in banking?

Increasing use of smart devices, improved connectivity and demand for high end-user experience are among crucial aspects that drive the digital transformation trend, taking services to the customer’s doorstep.

The banking industry is moving through such drastic modernization to enrich the scope for digital transformation across a multitude of functions. Following are the key factors that contribute to driving the digital transformation in the banking industry.

1. Leverage Power of Data

Banking institutions can avail the benefits of data and related tools and resources to foster their growth. The different practices associated with data analytics can be used to know and learn about customer thinking patterns. Analyzing the patterns helps them develop the desired product that matches customer needs. It could also acquire insights to offer the enhanced product, experience and strengthen the customer relationship.

2. Modernize infrastructure

Apart from the integration of innovative digital technologies, digital transformation is also impacted due to infrastructure. The infrastructure has a crucial role in streamlining the information flow required for digital front-end operations. The modernized infrastructure serves to support the digital platforms. For example, APIs, DevOps and microservice architecture can help upgrade the core systems for continuous integration and delivery, resulting in faster release cycles.

3. Continuous Improvement

With the doubling of consumer expectations, the banks need smooth functioning stages to track market trends, tests innovative products and use fast feedback mechanisms. These stages tend to consistent improvement in the banking sphere. These agile innovation pipeline stages contribute to on-demand service delivery, continuous improvement, resulting in accelerated time-to-market and customer engagement.

4. Upskill the workforce

The World Economic Forum’s report states that more than 55% of finance sector employees will need to upgrade their skill set to satisfy the current and changing demands of functionalities. The driving force for improved skillset will require necessary investment for change in operational and learning strategy, thinking pattern, skillset training and more across the teams.

5. Improving the customer journey

Nowadays, customers look out for seamless digital experiences across every channel service and product. Creating a digital customer journey means initiating the steps to integrate and merge everything into a single online platform. This would help to handle the customer through similar tools, similar people with the same information throughout the process. For example, a digitized customer journey allows a customer to click on an ad, sign up for an account online, receive tutorials and on-boarding information through their app, receive automated loan decisions, and pay bills or send funds online.

Digital transformation has developed the need for financial institutions to adopt a ‘customer-first approach to achieve success in this competitive scenario. Seamless service delivery, high end-user experience, personalized product services, transparency and high-security, stand at the forefront of customer satisfaction in today’s fast-changing market trend.

Which technologies can contribute to the digital transformation in the banking industry?

Digital transformation in the banking sector needs a radical shift to online digital services along with the change in backend processes to facilitate digitization and automation. To withstand the competency with digital natives, banks should provide an end-to-end digital experience to their customers by integrating necessary technologies. These technologies have made instantaneous financial transactions globally, thereby making the financial sector more efficient.

Here’s a quick rundown of technologies that have contributed to the digital transformation in the banking industry.

1. Artificial Intelligence (AI)

AI is reinventing the entire ecosystem of the banking sector as it stands at the forefront in its adoption. Banks can explore immense benefits with AI with low cost and more revenue through multiple channels. The Business Insider Intelligence report states that the average estimation of cost savings for banks with AI technology is expected to reach 447 dollars by 2023.

From improvements in speed, cost, accuracy and efficiency, AI-powered tools can use extensive data histories and support decision-making, enhance the customer experience and improve overall banking operations. The benefits of AI in banks and credit unions are widespread, reaching back-office operations, compliance, customer experience, product delivery, risk management and marketing and more. AI alone has the potential to streamline all the processes of banking operations. When integrated with other technologies like big data analytics, RPA, voice interface can lead to effective lending decisions and better risk management.

Following are some of the strategic areas where banking industries identify how AI can help them drive beneficial results. The use-cases of AI are organized into three main categories which highlight the potential areas of opportunities in the banking industry.

Potential Areas of Opportunities in Banking Use-cases of AI in Banking
Enhancing customer interaction and experience. Chatbots, Voice-banking, Robo-advice, Customer service improvement, biometric authentication and authorization, customer segmentation.
Enhancing the efficiency of banking processes. Process automation and optimization, Predictive maintenance in IT, Complaints management, Document classification, Automated data extraction, KYC (Know-Your-Customer) document processing, credit scoring.
Enhancing security and risk control. Enhanced risk control, compliance monitoring, any kind of anomaly detection, AML (Anti-Money Laundering) detection and monitoring, system capacity limit prediction, support of data quality assurance, Fraud prevention, Payment transaction monitoring, Cyber risk prevention.

Banks are leveraging AI on the front end to smooth customer identification and authentication, connect live employees through chatbots and voice assistants, deepen customer relationships, and provide personalized insights and recommendations. Here are some of the use-cases of AI technology that have transformed banking operations.

  • Robo Advisors
  • Robo Advisors are automated platforms designed to provide financial and investment management advice. They make use of algorithms to collect the information. These tools are developed using AI with cognitive systems, machine learning and natural language processing. Hence, Robo advisors are capable of providing suggestions related to investment catered to client’s expectations. Customers looking for digital interaction or with a ‘do-it-yourself’ approach can benefit from contextualized products and experiences, financial advice and cost-reduction.

  • Credit Scoring
  • Banks rely on collecting transactional data, statistical analysis and involved risks while checking clients’ creditworthiness. AI technology enables precise scoring with improved credit access and helps banks provide suitable debt plans for their customers. AI ensures that banks manage credit risk to maintain financial stability.

  • Fraud detection
  • Fraud detection has been the hotspot for the application of AI in banking.AI helps in the prevention of suspicious activities associated with financial crimes. A Fraud Detection System (FDS) handles the threats like attacks on banks or clients related to money transfer, identity fraud and fraudulent cases among the employees. The FDS undergoes several data collection stages, supervised adaptive learning and analysis of transactional data to detect fraudulent activities. Apart from saving money to financial institutions, AI-based solutions can be effectively used in AML and other financial crimes.

  • Virtual assistants and Chatbots
  • These applications of AI have revolutionized customer services and business communication. A virtual assistant can anticipate and answer thousands of customer questions and help customers perform banking transactions in real-time. Customers cannot wait for long hours to get their queries resolved. They demand quick response and effective solutions to meet their needs. In banking organizations, chatbots effectively offer financial guidelines, assist customers in registration, reduce the time and human resources for two-way communication like email, phone, etc. They are made smart conversations with millions of customers to connect with banks.

  • Productivity gains
  • Almost the top 20% of back-office work accounts for 85% of the cost. Labor-intensive work like compliance reporting, new customer onboarding communications, and documentation can become highly accurate and efficient with adopting AI tools and technologies.

2. Blockchain

It is a distributed ledger technology that acts as a decentralized database and helps the customers protect their financial data from real-time payments. As the name suggests, blockchain is an immutable chain that stores the information of the blocks. The immutable and decentralized nature of blockchain does not allow the tampering of information, thereby ensuring integrity and high security. It resolves issues like fraud detection and cyber attack prevention. Blockchain helps remove third parties in the loans and credit system, making it safe to borrow money and reduce interest rates. It also promotes transparency during payments & currency exchange in banking.

Blockchain technology allows easy streamlining of banking operations and automating processes with the help of smart contracts. Banks deploy blockchain technology to perform operations like inter-bank transfers, cross-border payments, KYC process, lending, fraud reduction and more. Leveraging blockchain technology can enable banks to quickly enhance their payments, remittances, and traceability goals.

Benefits of Blockchain technology in the banking sector include:

  • Time sensitivity
    Blockchain enables the real-time settlement of recorded transactions, reduces risk and provides an enhanced customer experience.
  • Manual processing
    Blockchain maintains an automated audit trail of transactions, reducing manual processing for data validations and reconciliations.
  • Transparency and Immutability
    The hash/pointers of the records written on the blockchain are immutable and irreversible. As a result, it is impossible to modify any data, eliminating the risk of fraudulent cases.
  • Authentication
    Smart contracts allow business validations and automated records for transaction processing.
  • Intermediary
    Blockchain is a distributed ledger technology thereby removing the middlemen and reducing costs and lowering latency.
  • Data Distribution
    Blockchain’s distributed ledger and consensus mechanism allow data consistency across multiple participants.

Apart from multiple benefits, blockchain offers ample opportunities to utilize in the banking industry. Some of the prominent use-cases of blockchain in banking are as stated below.

  • Payments and Clearance
    Cross-border payments are faster and cheaper with banking in the blockchain. The remittance costs within the blockchain are 2-3% of the total amount compared with 5-20% withheld by other third parties. It removes the need for intermediaries or third-party authorization, thereby speeding up the cross-border payment process. Accenture estimates that investment banks would save 10 billion dollars with blockchain deployment in improving the efficiency of clearing and settlement systems.
  • KYC
    The blockchain acts as an anchor for automating KYC processes. As blockchain is a secure distributed ledger, it can store and share KYC-oriented data. Banks invest a lot of time in verifying where customer money came from, their financial history, their business interests, and so on. The industry has to automatically update a database for KYC-based customer data. When looking for a legally permissible solution to share such data between banks and loan officers, it is better to opt for a blockchain solution.
  • Trade Finance
    Financial institutions act as the guarantor of payment between seller and buyer. While issuing a letter of credit to the seller requires intermediaries — banks, financiers, insurers, and export credit agencies. All of them tend to cost more. Implementing blockchain-based solutions for trade could reduce record-keeping costs, eliminate intermediaries with savage of time and money.
  • Syndicated Lending
    Syndicated lending implies providing loans to individuals by a group of lenders. These lenders are usually banks. The involvement of numerous participants hampers the processing time in the case of conventional banking methods. Therefore, blockchain-based solutions speed up the process, thereby ensuring transparency. The decentralized ledger technology helps the banks distribute the tasks related to local compliance or KYC and attach them to a single customer block.

3. Cloud Computing

Implementing cloud computing in banking enhances the performance of financial institutions and scale-up services more quickly. The pay-as-you-go facility makes it easy for individual customers or businesses to pay only for cloud usage. In the banking industry, cloud computing helps to promote safe online payments, digital money transfers, wallets, etc. By leveraging cloud-based services, banks can decrease data storage costs through saving on capital expenditure (CAPEX) and operating expenditure (OPEX) while ensuring customer data protection.

One of the beneficiaries of cloud solutions in the banking sector is LiveBank. This virtual branch banking platform is partnered with Microsoft for imparting access of global banks to a catalog of cloud solutions for their customers. The Reserve Bank of India adopted a suite of cloud-based solutions for driving communication and improving collaboration among its personnel and provided better services to their customers.

Cloud-based services in the banking environment offer the following benefits.

  • On-demand scalability:Cloud-based services are agile and can provide additional technology resources whenever required as per banking institutions’ requirements. Hence, it would be beneficial for banks that own their data centers in terms of cost.
  • Security and availability: Cloud vendors offer the banking sector restraints on data manipulation in a cloud ecosystem. These security and audit restrictions facilitate audits and minimize penetrative attacks, which would otherwise require significant investments to execute in an on-premise environment.

4. Internet of Things (IoT)

Internet of Things technology connects devices/sensors in a network to provide futuristic data-driven insights. IoT has gained importance in banking services, especially in retail banks, with large investments in internal infrastructure and consumer-facing capabilities. IoT covers numerous banking solutions with some of the existing use-cases mentioned below.

    • Smart Collaterals

IoT technology can enable banks to control a customer’s mortgaged assets, such as cars, machinery and help monitor them. The bank can issue the loan immediately and monitor the collateral status in real-time without taking physical custody of the asset. The bank can remotely disable or enable the machine/motor anytime based on defined business rules. For instance, if loan EMIs are not paid, the engine could be disabled. The quality of the collateral can also be monitored in real-time.

    • Wearable Payments

Wearables such as smart-watches, rings, apparel are poised to enhance the retail banking experience. Smart-watches add to the style statement and make it easy to transfer money and make payments from your bank. This whole new online banking experience through smart-watches has made it easier for a customer to interact with the bank directly from the wrist of the hand. Some banks have experimented with providing their own branded wearables to customers as a primary payment device. Smart glasses are the newest wearables adopted by some financial institutions to process customer information for the employees.

Paired with wearables, the impact of the IoT on the banking industry is growing tremendously. The IoT technology has the potential to transform the way banking organizations allow users to pay the bills, speed up the transaction, and increase its quality and security. Here are a few potential ways to use wearable technology in banking:

      • When the client arrives at the bank, the IoT system sends announcements and notifications related to finance to his wearable device. In this way, banks are able to foster a meaningful connection with customers and improve brand visibility.
      • Wearables can replace Google or Apple-based transaction apps to execute the transactions easily.
      • Contactless wallets enable bank clients instantly for checking their account balance or loan status.
    • Wealth Management and Automated Transactions

The data processing algorithms help to get wealth management insights. IoT technology plays a crucial role in enhancing accuracy and gains insights. These insights will help you in improving the decision-making for efficient wealth management.

An automated transaction IoT application in banking allows each of the payment transactions to be administered in real-time. IoT allows a secure and monitored trading environment where all payment procedures are executed with smart sensors and connected applications.

    • Proactive Customer Services

The Internet of Things (IoT) technology helps the banks to predict customers’ needs through scanned data collected at the time of their visits to banks. Right from the data collection to offering services, the IoT improves the customer experience in the following ways.

    • It is possible to redirect the clients to a free counter or notify them of the total waiting time to improve their task management efficiency.
    • A beacon-based system enables the bank clients to search the nearest branch in a different city or country;
    • Branches can share user data immediately to offer a quick and personalized experience in any location;
    • Banks can start functioning without any human intervention.

5. Robotic Process Automation (RPA)

The banking industry emphasizes the use of intelligent automation to drive efficiency, eliminate repetition, and improve customer satisfaction with quick services. The technology responsible for this automation is called robotic process automation (RPA).

With RPA, the bank can use customer service bots to deal with low-priority questions from customers like account balance checks, payment queries, etc. and save the time of human agents to deal with high-priority concerns. It will improve not only productivity but also lower operational costs and the probability of errors. It is possible for users to make a quick decision for their credit card application with RPA without any human intervention in the process.

Some important benefits of RPA in the banking industry are as follows.

  • Cost reduction:The cost of robot software is about one-ninth of a full-time employee in an onshore location. The cost pertaining to employees gets reduced on hiring a robot.
  • Accuracy: Robots are programmed to follow a set of instructions with great precision and productivity. Hiring a robot can uplift the accuracy level up to 99.5% as compared to humans.
  • Performance Efficiency: Robots are faster than humans at executing tasks. Therefore, RPA automates standard banking tasks like customer on-boarding processes, account opening, and loan processing to a certain extent.
  • Compliance: RPA can increase the compliance levels of monitoring and testing. RPA’s has the potential to collect and fetch the data from multiple sources. Thus, it enhances the efficiency of regulatory, non-financial, and risk reporting tasks.

6. Augmented and Virtual Reality (AR/VR)

Innovative technologies like Augmented and Virtual Reality are enhancing customer experience across the banking industry. AR / VR technologies enable complete autonomy to customers to execute the transactions from their homes. For example, the Commonwealth Bank of Australia had adopted an augmented reality application for their customers willing to buy or sell a home. It delivers the bank with information like current listings, recent sales and the price budget to help the customers make better decisions.

Virtual banks are also gaining traction by creating an artificial ambiance to connect with customers remotely. The virtual facility allows banks to provide customers with a complete banking experience, including interactions and transactions. Virtual branches eliminate the need for finding space to open a physical branch and help eliminate the operational cost associated with the branch.

Digital transformation in banking is a costly set of measures when it comes to customer management, automation of business processes, offering newer payment methods and more. The banking industry needs to consider this fact and prepare the full amount of resources required to implement emerging technologies successfully. With so many competitors in the market, the only winning point is to monitor the recent trends and start to implement them in a better way. Get immense benefits and improve business results by keeping in mind the latest technologies.

Are you also looking to encash the benefits of digital transformation? Contact our experts, and we will help you integrate digital technologies in building your financial solution. Our fintech experts understand the technical requirements of this industry and have the skills, experience, and in-depth knowledge to provide top-quality banking solutions with flawless results.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the founder and CEO at LeewayHertz. With the experience of building over 100+ platforms for startups and enterprise allows Akash to rapidly architect and design solutions that are scalable and beautiful.
Akash's ability to build enterprise-grade technology solutions has attracted over 30 Fortune 500 companies, including Siemens, 3M, P&G and Hershey’s. Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.
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