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Digital Operations in Banking: Advantages & Challenges

Digital Operations in Banking: Advantages & Challenges

Here is a story of a bank from the recent past that foretells the industry’s immediate future. Especially about digital operations in banking.

In June 2017, a mobile-only bank came into existence in South Korea. In its first 24 hours, 300,000 subscribers signed up. Within two weeks, it had surpassed 2 Mn customers. At that point, the bank had clocked $930 Mn in savings, and lent out $710 Mn. In 2 weeks, Kakaobank was in business!

As of today, in a country of 50 Mn people, with economically active population of 25 Mn, Kakaobank has 10 Mn + customers.

Be it any industry, it is obvious that orbit-shifting innovation precedes meteoric growth. But what is not obvious, are the fundamental questions that start it all. In the case of Kakaobank, these questions were: “What is the purpose of a banking business?”, Why sell loans, and the other products? Are we in this business for the money?”

Digital operations in banking are both about clarity and differentiation.   

Today when every other tech. company, social media, or an e-commerce company aspires to become a bank or a variant, a key question pops: is the sector more important or is the customer? The answer comes from the art of thinking clearly, and thinking for the long-term

Kakaobank’s vision emerged bit by bit. They didn’t want to beat their rivals’ rates. They wanted to transform banking by making it totally customer centric. Unlike traditional banks where 60% of outgoings are spent on branch operations and back offices, Kakaobank passed the cost differential to customers from day one. How? Through tech. assessment, risk control, customer experience design, the digital native offered on-demand services through mobile (not even online).

Current outlook.

The 2021 Global Banking Annual Review talks about how legacy financial entities will have to battle declining profits by 20% – 60% before 2025, if they fail to go digital. In fact, a HBR article in 2014 spoke of how 85% of US retail transactions had gone digital.

As if new market players, new regulations, and new technologies that disrupt customer’s expectations and perceptions weren’t enough; the recent virus crises, has brought in more complexities. Not only did digital banking accelerate, but also the use of cash fell, and sustainability and circular economies grew in mass opinion. All these factors have a direct impact on how banks make and spend money, and how their brand is perceived.

Not a question of ‘if’, but ‘when’, as legacy banks embrace varying degrees of digital operations, let’s understand the pros and cons that come with it.

Digital Operations Solutions in Banking – Advantages.

  1. Boost revenues, lower costs

Basis McKinsey’s executive AI playbook for Banking value, the potential annual value for AI and analytics (both traditional and advanced) is $1 Tn. Digital operations increases personalization exponentially, generates efficiencies via higher automation, reduced error rates, and better resource utilization.

  1. Enhancing customer experiences through uncovering new opportunities

Be it front office (biometrics, natural language processing for doc. scanning, humanoid robots in branches, and conversational bots) or back office (machine learning to detect fraud and cybersecurity attacks, real-time transaction analysis for risk monitoring) leading financial institutions are embedding more and more robotic process automation, virtual interfaces, and machine learning techniques, into their processes.

  1. Beyond retail, digital operations benefits small- or medium-enterprise customers

Today’s mid-size enterprise customers directly benefit from a bank’s digital operations. Here is how: from receiving customized lending solutions, to micro-expression analysis that reviews loan applications, to seamless inventory and receivables management, to being provided with a SME platform to source buyers and suppliers, and getting support in off-banking hours (by AI-powered virtual advisors)

Digital Operations Solutions in Banking – Challenges.

Digital transformation for legacy finance entities is not very different from flying an aircraft and repair it in mid-air at the same time. Consider their predicament: On one hand they are asked to operate with the nimbleness and speed that comes to Fintechs naturally, and on the other, they cannot sacrifice the rigorous demands of scale, security, and regulators.

In fact, across industries, graduating to become ‘AI-first’ or ‘totally digital operations’, calls for a strategic mind shift and putting in place foundational building blocks.

For banks though, the absence (or inadequately functioning) digital operations reveals immediate challenges.

  1. Lack of scale leads to sub-optimal efficiencies

Core systems if not modernized are simply not powerful to operate upwards of 150+ transactions/second. Along with the significant time, effort, and team sizes needed, it takes a long time to provision development and testing environments.

  1. Poor accuracy with lower customer satisfaction scores

High error rates, poor refresh rates, data being silo-trapped and difficult to retrieve, and process are all challenges that mean there is no single source of truth. Moreover, the system is ill-positioned to integrate with external sources, leading to timely (and costly) workarounds.

  1. Longer time to market

Limited software and code reusability across internal teams, and the difficulty in collaborating with external partners, results in poor user experience. When data and services are hard to stitch across functional siloes, legacy players find it difficult to combat market complexity. The result of limited coordination and cross-team testing is longer time to market (cost leakages).

To overcome challenges that prevent digital operations from going organization-wide, banks must, one, invest in transformational capability stack and two, aligning that stack for value creation.

Learnings from Kakaobank.

As the Kakaobank example instructs, the four indicators of successful digital banking operations are, profitability, personalization at scale, omnichannel experience, and speed that comes from innovation.



Essential Innovations That Will Accelerate Banking Tech Transformation

Essential Innovations That Will Accelerate Banking Tech Transformation

The real opportunity for banks lies in their ability to win and retain their customer trust with best-of-breed service experience.

The year of the pandemic witnessed banks across the world as well as back home in India, accelerating their digital transformation initiatives. Not only were they forced to condense their year-long plans, but their evolution also came with a tectonic cultural change – one that challenged traditional processes, encouraged innovation, and made them rethink every aspect of their future journey.

This radical shift towards ubiquitous digitization came with both the impetus as well as the opportunity for Indian banks to improve services, build loyalty, reduce costs, and develop the ability to spot bumps crucial to making the banking experience – with data at the heart of digitization. In the new world order where rapid decision-making, action, and response is imperative, financial institutions must now prepare for a holistic banking transformation with technology. Banks are also focusing on ensuring real-time engagement with their compliance and risk management teams, to put appropriate controls for comprehensive governance.

As the dust settles, questions emerge about what is next for the ‘banks of the future’, what gaps are sure to emerge in their technology stack, and which innovations they need in their arsenal for success.

Priorities in successful digital transformation

Simply put, the pandemic has created an environment where banks can demonstrate what’s possible with technology. Given this transformation has become a matter of survival, and the need to adapt quickly has become a norm, we are now witnessing some clear priorities for banking technology leaders in the age of digital banking:

  • Frictionless customer experience: Over the past year, banks have introduced a myriad of new ‘customer-first’ services from paperless customer on-boarding, video KYC, contactless debit cards, scan and pay, to tap and pay, UPI-based collections, and chatbots among others. Banks must ensure customers using remote channels go through a positive experience, both during and beyond any transaction.
  • Insights-led ecosystem: While lowering costs has remained a priority with digital, unlocking the full potential of this transformation must come from data – not only to provide exceptional customer experience, but also inject valuable insights into their operations to outperform competitors in profitability and productivity. Analytics will play a crucial role in personalising sales and marketing approaches for banks.
  • Digital operations: Banks need to reinvent their operating model by placing customers at the centre of their business. This will call for significant levels of legacy modernization, process automation and flawless integration to build a highly connected ecosystem. This is how banks need to operate digitally and deliver highly personalised customer engagement.

A combination of the priorities cannot be addressed in isolation. Banking leaders realize the need for a unified culture, relevant innovations, skill sets and redefined objectives to complete the digital transformation journey.

Essential Innovations – The enablers

It will not come as a surprise to know that banks with better digital capabilities will have an edge on technology laggards. To cope with the lockdown, customers are showing increase in the adoption of digital channels that offer near-real-time services and are looking down on financial systems that feel slow, complex, complicated, or cumbersome.

In fact, digital adoption of financial services is now well entrenched in India, with 1/3rd of Indian households already using digital payments in one form or the other, with access to the internet and smartphone is no longer a bottleneck.

In this context, I believe the following innovation enablers will be an absolute necessity:

  • Artificial Intelligence: With the rising adoption of automation, robotics, chatbot and more, greater mastery over artificial intelligence will help banks ensure frictionless customer interactions, predictive support against disruptions, overcoming rising compliance requirements and more.
  • API-led banking: Application Programming Interface or APIs will increasingly facilitate synchronisation between various services, reducing dependence on legacy technology environments, and rather improve quality IT through connecting applications, data, and devices. In the Europe, Open banking is a clear example of Open API’s led banking.
  • Cloud-led innovation: Instead of upgrading IT systems in the traditional way, cloud computing allows financial institutions of any size to modernize systems and enable innovations with new technologies easier and quicker. In the near future, more use of the cloud for democratized data collection, as well as scale existing abilities with improved capacity and security of information processing, will be crucial.
  • Regulatory technology: Reg-tech is increasingly becoming the go-to solution for banks to cope up with the staggeringly high, complex, and strict regulations. Also open to consumption using APIs and SaaS models, Reg-tech will be vital for banks to meet stringent requirements without much hassles.
  • Legacy modernization: The continued use of legacy systems ends up hindering most banks’ ability to successfully commit or embark on their digital transformation journey. Modernizing outdated systems and processes will enable banks to respond faster to customers. This has to happen across their internal and external facing systems. Cutting-edge tech will be a key enabler in supporting this journey.

The crucial role of technology providers

While digital transformation is inevitable for banks, each journey has its unique story. Speed will be a common hallmark in each and every digital transformation story. This means, getting it wrong can put

banks reputation at stake. This is why driving banking transformation will require conscious contextualization, core commitment, and comprehensive competencies from technology providers. In the era of ecosystem-led financial solutions, both banks and technology providers must work hand-in-hand.

At the end of the day, the real opportunity for banks lies in their ability to win and retain their customer trust with best-of-breed service experience.

Disclaimer: Originally published on BW BUSINESSWORLD