Rebuilding banking services for the post-pandemic digital age
Through Bharat Bhushan, CTO, Banking and Financial Services, IBM UK & Ireland
The pandemic has overturned a range of seemingly immutable certainties. The biggest societal change has been the reliance on digital infrastructure and connectivity and the adoption of digital self-service channels; blockades and social distancing have ensured this.
For the financial services sector, this digital migration is accelerated by four key factors:
First, an increased digital literacy is accelerating the shift in consumer behaviors and expectations towards simple, personalized experiences in all the services they use, including banking.
Second, there is a need to deliver operational excellence that connects people, processes and technologies holistically while aligning with new revenue streams and restructuring operational costs.
Third, issues related to compliance with a series of regulatory changes have taken place in recent years. A key development, which the industry has also voluntarily initiated in some countries, is the deployment of open banking. It aims to democratize consumer banking data and means of payment so as to support the wider ecosystem in the creation of value-added services. In the long run, these services could help individuals and businesses better understand and manage their finances.
And finally, there is growing competition between big tech companies and fintech (financial technology) companies. Most fintech startups develop solutions to address a narrow set of needs and gaps, while large tech companies, which potentially have access to hundreds of millions, if not billions of customers, quickly onboard financial services in their offerings.
Changes in the High Street banks
Meanwhile, back on the High Street, traditional banks face significant challenges in sustaining their bottom line and bottom line. This is in part the result of low interest rates in most of the world’s economies, driven down by COVID-19 and the rising costs of doing business. In addition, the traditional banking business model is anchored in an analogous era of in-branch product distribution that relied on face-to-face relationships.
This makes them vulnerable to smaller, agile digital and platform business models with fewer physical assets to maintain and a much lower overall cost structure. They have proven to be able to outperform traditional businesses in a number of key areas, including better customer acquisition and retention rates as well as revenue. Above all, they boast of a high number of data-fueled daily interactions that generate improved conversion rate levels.
Growing demand for a personalized experience
A new UK research survey by YouGov1, conducted on behalf of IBM, revealed that younger generations want personalized services and help them manage their money. Sixty-one percent of people aged 18-24 said they wanted their bank to offer tailored support for their finances; 54% approve of banks using artificial intelligence (AI) to achieve this goal.
The push for open finance could facilitate these demands by using application programming interfaces (APIs) – the connections that allow computer systems and applications to communicate with each other. These APIs allow developers to exchange data, send instructions, and build systems that use the capabilities of a much larger ecosystem of partners and service providers.
Personalization in the digital age requires transformation
The goal of this type of digital transformation is to seamlessly bring together people (including customers, partners and employees), processes and technology to create a unified ecosystem. In order for this to be fully achieved without compromise, banks must take into account a number of factors.
First and foremost, ensuring end-to-end security is essential. Understandable concerns about cybercrime and fraud, including identity and access management, must be addressed and allayed. There are also considerations for regulatory actions, such as GDPR (General Data Protection Regulation), and where data is stored, accessed, and processed. Then, to successfully establish an API-first approach, an internal or external developer must be able to discover, subscribe, and consume APIs without any manual interaction with the API provider. This enables an end-to-end value chain using straight-through processing. Most legacy systems were not designed with APIs in mind and will require considerable modernization efforts. This can be done either by applying an API facade or by dividing the monolithic application into separate and independent business functions.
A cloud-centric model enables the bank to leverage new technologies that can improve the user experience, such as the selfie-based integration made possible by computer vision, a branch of AI. Additionally, as digital interactions generate data, banks can use it to understand how customers interact with and use these products and services. This information can be used to refine the offering and develop new capabilities beyond the reach of traditional banking services.
The journey to delivering all of this requires a transformation of talent across the bank, from new soft skills and careers, such as product and interface design, to technical skills, such as development and operations based on the cloud. In addition, KPIs (key performance indicators) that measure employee performance will also need to be adjusted.
Above the change and governance processes will be the need to adapt to reflect and accept the rapid flow and iterative change. In addition, building partnerships with companies with common visions that have a proven track record in their own fields and that are willing to invest in common success will be crucial. For example, working with cloud service providers with built-in security and regulatory controls and assurances for financial services will speed up the journey.
Putting it all together: a five-point plan
Digital transformation is a journey. As the bank matures in its digital and organizational capabilities, the following five point plan can help it transform into a platform business:
- The first step is to develop a clear strategy that identifies the target market and the chosen customer group. Concretely, how could the banking services they need on a daily basis be simplified, automated, integrated or made completely invisible?
- Start with a smaller number of use cases and learn from them. This allows the bank to test and update new and scalable digital capabilities and learn how to use enterprise-level resources to scale.
- Stay obsessed with customers and use the data to drive relevant offers, experiences, and interactions.
- Adjust internal metrics and goals to match those of a platform company. For example, measure the extent of customer interactions on the average number of banking products sold.
- Develop business relationships with partners, including fintechs, who are willing to share the investments and rewards.
Together, these steps will help generate and achieve the best possible results in an increasingly demanding environment and market.
An agile and data-driven future
No one could have predicted the pandemic, the seismic changes it would trigger in the daily lives of people around the world, or the impact it had on accelerating change in the financial services industry. Fundamentally, the role of banks has shifted from receiving deposits and lending money to providing life-integrated services for their customers.
The financial services industry must therefore transform and focus on creating an agile digital platform model, rich in opportunities for interactions to generate user data that can be leveraged to personalize services, add value. to the lives of customers and, as well, find new sources of income.
For the financial services industry, this is only the first chapter in what promises to be a long history of discovery. The journey to an agile, data-driven future has only just begun and there is still a lot of work to be done.
1 IBM: “New IBM study finds UK banks need to do more to boost customer confidence in a more digital world», July 27, 2021.