Are traditional banks getting their money’s worth from the US$1 trillion they have invested in digital transformation over the past three years? Depends, says Accenture, whose recent analysis of 161 large retail and commercial banks worldwide perhaps controversially revealed “not always.”
Among the key findings: “Half (50%) of banks are achieving higher profitability and returns on equity, driven by greater operating leverage, but they’re not achieving differential revenue growth — instead competing for high market share of revenue growth in a slow-growth revenue pool.”
Among Accenture’s advice to the most-digitally-advanced banks: “To continue to win investor confidence and reap the awards of digital investment, these banks would do well to focus on balance sheet growth by, for example, using Open Banking to help acquire and manage customer relationships.”
More worrisome perhaps is another trend suggested by the report: the “Digital Divide” between earlier adopters of digital transformation (“Digital Focused” and “Digital Active”) and the rest (the 50% of those banks who have yet to make progress in digital transformation and face loss of confidence from investors for it).
Meanwhile, digital-native FinTechs are increasingly setting the tone for banking across the board. All banks are no longer judged on traditional banking measures, but on their customer experience and level of engagement.
Where does this leave commercial banks? On the plus side, commercial banks are generally less further-along in digital transformation than retail banks, and thus, as they forge their paths, may be able to learn from the latter’s successes and mistakes. On the downside, the risk would seem to be in waiting too long and missing out on opportunities. The competitive efforts of the Digital Focused and Digital Active, whether misguided or not, have “the rest” in their crosshairs.
What is Digital Transformation?
A standard definition of “digital transformation” itself remains elusive. Gartner Research Director Jorge Lopez calls it “Digital Business Transformation” and explains it as “the process of exploiting digital technologies and supporting capabilities to create a robust new business model,” ideally driven by the highest level of company management. Broadly accepted is the fact that digital transformation involves fast-moving digital technologies, and that the end game is dramatically more efficient, effective and personalized service of customers.
While there is no “one-size-fits-all” approach to digital transformation for banks, there are some emerging principles. For commercial banks, digital transformation involves migrating from their traditional IT model as systems of record to systems of engagement: intelligent engagement that makes banks and businesses smarter. Banks need to adapt their infrastructures to compete both at the point of engagement with customers and within the ever-evolving global banking and payments ecosystem. They need to deliver customer experiences comparable to those of Google, Uber, Venmo, Airbnb, and other digital platforms that populate our daily lives as consumers – certainly a tall order. At the same time, traditional financial institutions are trusted for their services. Adopting a modern digital UI can expand upon that trust via a familiar digital experience.
And the time may be now. Using their digital savvy to lower operating costs, FinTechs, BigTechs and larger, Digital Focused banks are targeting smaller and regional commercial banks on their home turfs. Targets range from the latter’s bread-and-butter businesses (corporates’ primary operating accounts and bank relationships) to low-hanging, high-risk fruit such as small business lending.
Digital-Focused financial institutions are striving to win the digital battle for primary ownership of the customer relationship. Intelligent engagement can provide a unified view of data and customer relationships, often using machine learning and artificial intelligence to deliver actionable insights for banks about their customers. As Capgemini notes: “With new-age competitors such as FinTechs and other challenger banks threatening to grab the most profitable aspects of commercial banking, it is a critical time for banks to invest in emerging technologies and to fundamentally improve the way they serve corporate clients in order to retain and grow business and increase profitability.”
An Open Opportunity: Buy-vs.-Build DX
The good news is that today, there are more “buy-vs.-build” options for digital-transformation technology and expertise, even for smaller banks (commercial banks with <$20 billion in assets). These solutions take advantage of the cloud, Software-as-a-Service (SaaS) delivery models, Application Programming Interfaces (APIs), mobile capability, modern UX design, AI/machine learning, and other fast-moving digital technologies. Good solutions can speed the pace of digital transformation and innovation, often without the usual high investment costs in new in-house IT skills and infrastructure.
The main feature of these evolving, modern digital-banking platforms is their architectural openness and embrace of the emerging open-finance ecosystem.
For example, larger commercial banks can “wire-around” their legacy back-room systems using APIs, in deploying a partner-provided private digital cloud-based platform or solution. SaaS solutions let smaller banks replace outmoded, processor-provided solutions with modern digital banking platforms, including the ability to differentiate themselves by bundling-in outside services (for example, from FinTechs) via APIs. As a result, they can deliver personalized workflows for large corporate customers and SMEs from a single platform; deploy simplified payment processes (e.g., for ACH payments and wire transfers) to generate new revenue sources, and customize the platforms with their brands.
Banks can also embrace changes in banking faster and more effectively, such as Real Time Payments (long a fixture in the European Union and elsewhere, and making fast inroads in the US). Streamlining corporate payment services is a key opportunity for banks, according to Capgemini, which “usually takes days or even weeks, with loads of paperwork to process a payment in the traditional corporate payments system.”
Most importantly, banks can deliver personalized, persona-based commercial banking experiences on par with consumer experiences for their ease of use and simplicity, improving customer loyalty and “stickiness.”
Consider the experience of LegacyTexas Bank, a commercially oriented community bank with $9+ billion in assets, located in the Dallas-Fort Worth Metroplex.
Like most regional banks, LegacyTexas Bank has a deep understanding of the local business landscape and a successful commercial lending business. However, it struggled to compete with larger, national banks for primary-bank relationships, operating accounts and associated deposits. By adopting a SaaS digital banking platform (replacing its processor-provided online cash management system), the bank has been able to broaden its breadth of engagement with customers. It can now deliver a seamless experience that strengthens its relationships and makes it easier to attract new customers. The platform went live nine months after the initial kick-off, delivered a new core interface without negatively impacting bank operations, and includes modern security and fraud protection. The bank reports measureable growth in its deposit accounts since they implemented its new platform.
Benefits of Digital Transformation
Digital transformation leverages and enhances commercial banks’ and credit unions’ legendary assets: trust, local knowledge and access. With the new platforms, financial institutions can:
- Onboard and deploy commercial customers more quickly, with experiences comparable to retail banking.
- Quickly deploy the basics: table-stakes features like mobile, superior UX design, and modern automated payments and cash management.
- Deliver automation with steadily more-sophisticated personalization across all channels, powered by artificial intelligence.
- Introduce new efficiencies into customers’ daily operations, such as more-automated payments and reporting, real-time cash management, and predictive/preventive fraud protection.
- Engage more deeply, persistently and proactively with corporate customers, evolving from transaction-handlers and report-generators to valued, in-the-trenches advisors.
- Obtain or regain the primary-bank relationship by offering more — and more value-added — services, including the banks’ services and third-party-provided services (via APIs).
- Add new features and services for commercial customers quickly — i.e., an integrated B2B payables system (single-source ACH/card/check processing).
- Reduce customers’ operational risk — i.e., payment risk and fraud management — by outsourcing it to experts.
- Get continually smarter about their customers with AI, machine learning and analytics, now being delivered as part of SaaS services.
With the rapid and competitive evolution of such service-oriented offerings, the future for all commercial banks suddenly looks a lot more open. Digitally empowered banks of all sizes can more effectively compete and win in commercial banking, becoming indispensable financial and digital transformation partners to their customers.
Stay tuned for Part 2 to learn the #1 critical success factor to Digital Transformation for commercial banks. Subscribe now to be notified when Part 2 goes live.