Digital transformation in banking: A complete guide

Tristan Ovington
By Tristan Ovington
Updated May 21, 2023

Banking on Digital Transformation: Why the Time is Now

The banking sector, once characterized by its traditional brick-and-mortar operations, now finds itself at the forefront of digital innovation. As customer expectations evolve and the demand for seamless, personalized experiences intensifies, it has become clear that the time for digital transformation in banking is now.

By embracing cutting-edge technologies and user-centric solutions, financial institutions can enhance their service offerings, streamline processes, and remain competitive in a rapidly changing landscape.

The urgency to adopt digital strategies is not only fueled by the need to cater to tech-savvy customers, but also by the emergence of disruptive fintech startups challenging the status quo.

A recent report by Alkami reveals that mid-size banks and credit unions more than doubled their investments in digital transformation in the fiscal year 2022 to nearly $425,000 per $1 billion in assets—up from an average of just over $200,000 per $1 billion in assets for fiscal 2021 and it’s only expected to grow in 2023.

As we delve into the era of digital banking, it is essential for financial institutions to take bold steps in transforming their operations, ensuring that they continue to deliver value, convenience, and security to their customers in the 21st century.

What is Digital Transformation in Banking?

Digital transformation in banking refers to the integration of digital technologies and innovative strategies into the financial services sector to improve operational efficiency, enhance customer experiences, and adapt to the evolving market landscape.

This process involves the modernization of traditional banking systems, processes, and business models, enabling banks to deliver seamless, convenient, and secure services through various digital channels.

Key aspects of digital transformation in banking include:

  1. Omnichannel Banking: Providing customers with an integrated, seamless experience across multiple channels, such as online banking, mobile apps, ATMs, and physical branches.
  2. Personalization: Leveraging data analytics, artificial intelligence (AI), and machine learning (ML) to tailor products and services to individual customer needs and preferences.

  3. Automation and Process Optimization: Implementing technologies like robotic process automation (RPA) and AI to streamline internal operations, reduce costs, and enhance efficiency.

  4. Advanced Security Measures: Adopting innovative cybersecurity solutions and practices to protect customer data, prevent fraud, and ensure compliance with relevant regulations.

  5. Data-Driven Decision Making: Utilizing big data analytics and advanced algorithms to make informed strategic decisions, optimize risk management, and drive innovation.

  6. Collaboration with Fintech and Open Banking: Partnering with fintech startups and embracing open banking initiatives to foster innovation, improve customer experiences, and expand service offerings.

Overall, digital transformation in banking is an ongoing process that seeks to reshape the financial services landscape by embracing new technologies, innovative business models, and customer-centric approaches to meet the evolving demands of the digital age.

What technologies are used in financial institutions today?

For banking transformation leaders to implement a successful digital transformation strategy using the latest digital technologies, they must be familiar with the existing technologies in the banking sector. The first of these is digital account opening. 

Digital account opening

Digital accounts are an ideal example of modern technology in a bank’s digital transformation that supports the digital engagement of customers. By automating the opening of accounts , banks can improve the customer experience and reduce the time it takes to open an account.

Additionally, this is one of the best digital technologies to help banks identify potential customers and cross-sell their products.

Application Programming Interfaces (APIs)

Application Programming Interfaces (APIs) are essential in banking today because they allow businesses to connect with new customers and partners and create new products and services. By exposing their APIs, businesses can make it easier for developers to build integrations and applications that work with their systems. Doing so can help them to reach new markets and drive innovation.

Additionally, APIs can help businesses to optimize their operations by automating workflows and processes.

Forbes reports that, in 2021, one in four institutions planned new investments in APIs. Before this year, about half of credit unions had already developed or invested in APIs, but banks are finally starting to catch up.

Video collaboration

The COVID-19 pandemic stopped face-to-face interactions, forcing banks and credit unions to speed up their plans to use video collaboration tools.

In 2021, 25% of financial institutions planned to invest in this technology for the first time. In 2020, only 20% of banks and credit unions deployed these tools—but this has risen dramatically since.

For many financial services executives, this signaled a significant psychological change. They accept that physical branches may not be nearly as important as digital channels for once.

Person-to-Person (P2P) payments

P2P payments are becoming increasingly popular among consumers, but financial institutions are starting to see a decline in P2P payment usage.

Every year since 2019, the number of banks and credit unions expected to deploy a new or replacement P2P tool has decreased. In 2021, that number was down to about a quarter for banks and a fifth for credit unions. 

Zelle, however, continues to grow in popularity–500 institutions currently offer its P2P tool (including nearly all of the 25 largest banks) and, in 2020 alone, it processed $307 billion via its services.

Cloud computing

The general sentiment within the banking and credit union industry has shifted from skepticism to acceptance of cloud computing in recent years. While some still resist this transition, most believe moving to the cloud is inevitable.

The challenge for the tech vendors has shifted from convincing businesses to move to the cloud by promising faster speed-to-market and lower total cost of ownership to presenting viable migration strategies and accurate projections of process and cost impacts.

How does a digital transformation strategy apply to banking?

Digitization revolutionized banking as consumers expected modern banks to deliver their services using new tools. Although banking hasn’t changed at its core, how banks aid new customers has. In our current age, businesses must use updated technology to support this digital change both internally and externally to improve customer experiences.

Many banks still see their digital future as a distant goal rather than something to implement in the present. The current pandemic crisis puts immense pressure on technological capabilities, requiring more remote experiences and revealing new cyber-security threats. 

What is the transformation process in banking?

Whereas some financial organizations have been hesitant to shift away from tried-and-true methods, most recognize the tremendous advantages of doing so. Profoundly changing how technologies define business activities, processes, competencies, and models can result in optimized operations and a much-improved customer experience–not to mention staying ahead of the competition.

If you find acquiring the digital and leadership resources you need challenging, you’re not alone. Many financial companies face this issue when trying to improve themselves or their businesses. However, getting started with the strategic planning process is one feat, and maintaining this momentum is another. Instead of seeing transformation as an intimidating process, see it as a journey that starts with figuring out your destination and mapping the route you’ll take to get there.

If your financial institution is prepared to begin its digital transformation, here are a few key steps:

1. Establish objectives

Firstly, transformation teams must discuss several questions to establish the business objectives they wish to achieve with digital workplace transformation. What do you want to accomplish? Do you want to implement a digital-first mindset and improve legacy systems and processes? Do you want to attract and retain new customers and members with digital services? Is your goal to leverage digital assets specifically to grow your deposits or loan portfolio?

When you answer these questions as a way of setting your goals, keep in mind the following:

  • Initiative leads and supporting cast
  • Gradual progress versus sudden, radical change
  • Data and metrics resources
  • Whether you need support from a third party

This step includes creating a short list of priority objectives for your digital transformation.

2. Contrast your products against competitors

Where does your business rank in terms of its online presence in today’s digital age? Are your products marketed toward those who primarily purchase goods and services online? Do you utilize digital platforms to teach your team and customers more about what you offer?

A few things to think about when comparing your product offerings to those of your competitors are:

  • How you inform customers of your products
  • How your packaging appeals to customers
  • What your website offers, its accessibility, and its design

The aim is to see how your financial institution compares digital services by measuring them against traditional and non-traditional competitors.

3. Evaluate your technology and processes

Assess your current stock of systems and products, as this is your set of tools to complete your business processes pre-transformation. Are there abilities that you haven’t utilized yet? Do you set up annual product planning that agrees with your budget and strategic plan?

A comprehensive review will show you what you need to work on and what improvements you can make. You’ll also understand how to use what you already have and what new digital tools or capabilities you should introduce to improve your online presence.

You can increase customer satisfaction by being clear about your processes. Ensure that your processes support digital account opening and are consistent across channels. App store ratings and other social media channels can give consumers valuable feedback on the apps and tools you offer.

The following criteria will help you determine whether or not to change your processes:

  • Feedback from the app store
  • In-branch services
  • Whether existing digital services are optimized
  • Multichannel experiences

The objective is to produce an extensive list of processes your transformation will involve while factoring in time and budget restrictions.

4. Assess your culture

In business, culture is everything, and a transformation will challenge the status quo as it often leads to a radical cultural change. You need to assess the characteristics of your culture to ensure the transformation improves the weaker elements and the changes do not destroy the positive aspects of your culture.

Any company-wide change places emotional strain on the individuals in a company, as digital transformation can be incredibly challenging to an established culture. Whether or not the upper management is on board with the changes you want to make will play a significant role in how successful those changes are. Getting everyone on the same page might be more difficult if decisions come from the bottom up. 

Have you considered what organizational structure would work best for digital optimization? Do you have digital experts on staff who can help employees or customers who may not be as comfortable with technology? Are your recruitment and training programs developing the necessary digital talent? You must ask these questions to ensure that the planned changes protect your culture. 

Some factors to consider when determining if your company is ready for digital transformation include the following:

  • Whether your current culture can adapt
  • If leadership supports the change
  • The potential new organizational structure
  • How recruitment and training programs align with digital needs

To create a successful digital transformation, companies must have aligned and accountable leaders and staff that can support the transformation.

5. Define customer needs via data and analysis

Data aggregation can be challenging, but you need it to understand your target audience. Take a close look at how you’re doing it now. Are you segmenting your consumers by demographics, lifecycle, and product mix? How do your digital services align with customer segments?

As you create your segmentation strategy, consider these key points:

  • Which products are selling well and generating the most profit?
  • What digital services do you offer that could appeal to customers?
  • Do you have a way to collect data on customer behavior and preferences?
  • Are there any new offerings you could introduce that would encourage growth?

The goal is to develop a plan for predicting which consumers are more likely to add digital services so that you can reach out with targeted marketing.

6. Prioritize resources 

A practical and realistic mindset is essential when working towards your objectives from step one. Consider that digital transformation can happen gradually by starting with just a few key projects you can improve upon later. Stakeholders need to be aware of this attitude.

Set your priorities for a digital transformation by:

  • Identifying quick wins
  • Considering other initiatives that may be contending for resources
  • Avoiding tackling everything at once

Once you know your objectives, create a prioritized list of tactics to enable your institution to make change happen incrementally, starting with a few small successes.

7. Promote buy-in at every level

After you establish your digital transformation goals, implementation follows next. And this requires effort from everyone–not only those mentioned in our prior discussion about culture but also enthusiastic buy-in from your staff and customers.

To build excitement for the transformation:

  • Develop a clear internal communications plan that sets out specific roles and responsibilities to make your digital program successful, and continue promoting it internally
  • Create an external marketing plan that outlines what consumers can expect when interacting with your financial institution and the benefits of new digital products and resources

A standard way to access and manage information allows people within your company to give input that can lead to informed decisions being made enterprise-wide.

A well-structured change management program is essential to ensuring that staff at every level receives enough support to implement the transformation. However, even with a structured change management program, it can be tough to achieve lasting change due to the many fluctuating challenges throughout the transformation. But when staff achieves it successfully, they will become gung-ho about change, ready for constant new experiences and innovations. 

Challenges to achieving digital transformation in the banking sector

The banking industry’s digital transformation has been especially challenging for retail banks. With modern consumers constantly changing their demands and fintech startups’ disruptive force on the rise, traditional banks are feeling more pressure than ever to innovate and adapt.

Examining each of these obstacles will allow you to ensure that you and your organization are doing everything to ensure a successful transformation, including: 

Tackling security obstacles at scale

IT infrastructure security is one of banks’ principal digital transformation challenges today. IT security was much more straightforward in the past, as you simply needed a firewall. Today, however, that’s not enough.

Some of the most influential examples from 2022 include:

  • Credit Suisse Data Leak – A German publication obtained the data from 18,000 Credit Suisse accounts, revealing that the Swiss company had “several high-profile criminals on their books.”
  • Cash App Data Breach – 8.2 million Cash App customers victim to a data breach, confirmed by Cash App’s parent company, Block.
  • Flagstar Bank Breach – This data breach affected 1.5 million Flagstar customers. The company discovered the potential breach in June 2022, although it is still unclear whether customer information was accessed or misused.

Tackling security at scale allows banks to protect their customer’s data and the organization’s reputation and is essential to prevent litigation and loss of revenue.

Opting for digital, bricks-and-mortar, or a combination

Despite the wide use of digital technology, many clients still prefer to do business inside brick-and-mortar branches. This social trend is one of many key factors that banking industry players must consider as both a challenge and opportunity in equal measure: being able to satisfy the needs of all customers while also achieving transformation.

Some customers use their phones to check balances but prefer a desktop computer to make payments. Others appreciate the convenience of an online questionnaire when applying for loans. However, customers still feel it’s essential to have a local branch nearby.

Within the digital banking transformation discussion, there seems to be a misconception that bank branches are dying out. However, this view isn’t accurate because many still prefer face-to-face interactions when discussing critical financial matters like personal loans and mortgages. Digital tech cannot wholly replace these traditional interactions and can enhance and complement them.

Moving away from legacy systems

Outdated software in many banks is a cause for concern, as many consumers want a better experience than traditional banking. For example, many large banking systems still use the COBOL programming language, which has been around for over 60 years. Moreover, a Forbes survey reveals that nearly 60% of banks have legacy mainframes of 5-10 years old. 27% reported having 11-to-20-year-old mainframes, while 9% had equipment aged 21 to 30 years old.

The current systems can’t handle the volume or type of traffic that today’s digital age requires, making an upgrade necessary.

Moving from an old, unconnected banking system to a modern, digital one is difficult and time-consuming. You will have to invest many resources upfront in suitable applications, security, custom processes, and integrations with external systems. In addition, you will need to train your employees and keep them updated if you want to get the most value out of your investment.

Centralized security and compliance platforms make monitoring safety and following requirements easy. Showing you’re invested in data privacy also builds customer confidence in your organization.

Building a social media presence

Banks should offer interactions with their clients on their preferred platforms, including social media and webchat. With the expansive reach of Facebook and other social media, it only makes sense that investments in these channels will continue to grow.

It’s also crucial to protect your social channels from intentional malicious intrusions or careless staff negligence. It’s easy for an employee to post something innocently misinformed or a regulatory violation at worst. However, utilizing social media to respond rapidly to client communications can be dangerous if banks don’t implement the appropriate security and compliance protocols.

In an industry where trust is essential, it cannot be stressed enough how important it is to have control over social communications. Companies must prioritize securing their social media channels. By utilizing a centralized monitoring system, businesses can prevent corporate policy violations before they become public and damage the company’s reputation.

Tearing apart silos and reducing risk

Due to banks existing in various segmented departments with unique goals, they often stunt the organization’s growth. For example, when customers apply for new services or need support from their bank, they are often passed around from department to department without any resolution. This lack of scalability and customer satisfaction has led to a negative reputation in recent years.

Digital transformation in banking ushers in a unified platform that eliminates silo issues by centralizing data and connecting various departments and systems. It’s important to remember that information silos can also lead to security risks and compliance issues due to a lack of cooperation when making corporate policy decisions. With marketing now the new frontline for brand defense, CMOs should work together with CISOs to implement practical solutions for everyone involved.

If banks want to avoid becoming obsolete, digital transformation is a must. Many thriving financial organizations welcome digital transformation to improve customer centricity or expand their pool of users with digital wallets. Additionally, these companies gain the “security through transparency” that comes with digitization—an advantage for them and their customers.

3 examples of digital transformation in the banking industry

Learning from a previous banking digital transformation is an effective way of building knowledge of how to plan and implement your changes. Below are three examples of successful banking industry transformations.

1. Santander

Joaquim Cols, Director of Operations at Santander Technology UK describes his approach to digital banking in the following way:

“We wanted to create an ecosystem that would enable this organizational construct to have more agility as an enterprise, and that would allow us to connect strategy to delivery, add transparency, and simplify processes day-to-day… at the very base is optimizing IT tooling.”

Given the constantly changing landscape of UK banking, Santander needed a flexible response to market changes. Santander ran business and IT processes in a poorly integrated way, leading them to slow decisions and inefficiently managed resources, which created obstacles to initiating change. They needed an operating model and software that would evolve as their company changed.

Planview’s Project Portfolio Management solution was a crucial component of Santander’s success. Using Planview, Santander could take multiple companies working independently and integrate them into one smooth operating model. The combination of agile processes and traditional project portfolio management helped speed up this integration while allowing for adaptation to ever-changing circumstances and governance.

Every year, Planview reports that Santander devoted 6.5 million hours to managing 500 business initiatives, 2,500 pieces of work, and 4,000 users. Thanks to ProofHub’s resourcefulness tracking features, they significantly improved their budget reallocations (80% increase) and quicker decisions (25%).

2. Natwest

Stephen Marjot, Head of Change Center of Excellence at NatWest (formerly RBS) explains his approach to digital transformation:

“We had to move from a traditional operating model based on traditional methodologies to thinking more about incremental, iterative value delivery where we could pivot quickly to meet the changing needs of customers.”

Before July 2020, the public knew NatWest as the Royal Bank of Scotland (RBS). Being a financial institution that has been around for centuries, they are very experienced in innovation and change. With over 70,000 employees and 700 banking locations worldwide, they knew that any transformation would have to happen gradually.

Before RBS began its digital transformation efforts, it was challenging to make changes quickly because too many layers of management and staff had to complete operations manually. Without transparency, management often ignores innovation that increases productivity and efficiency.

Their transformation helped standardize and simplify processes and toolsets by creating transparency across all teams so dependencies could be correctly identified and defined. In addition, they implemented Lean-Agile practices and mindset company-wide.

3. Commonwealth Bank (CBA)

Christian Eggers is the Executive General Manager at CBA bank. He describes what is important to CBA in the following manner:

“CBA [will] deliver and manager our significant change agenda through greater transparency of project data.” 

Despite being one of the largest banks in Australia, Commonwealth Bank (CBA) was not immune to its digital transformation struggles. In a recent interview, Christian Eggers – Executive General Manager at CBA – noted some problems they experienced with their past tools. These included reduced project data transparency across teams, multiple ‘sources of truth’ for different processes, and justification for expenditure becoming more complex.

The importance of new portfolio management software can be hugely beneficial for organizations that invest large sums of money into technology each year. CBA plans to standardize around 100 processes related to finance for a team of over 10,000 employees using this software.

Bank leaders must research past bank transformations to learn from previous successes like those described above. But what are the current trends for leaders to be mindful of when planning their digital banking transformation?

What are the current trends in digital banking and finance?

Digital banking is changing the face of the industry. These trends transform how customers, banks, and businesses operate, from mobile-first strategies to increased use of artificial intelligence. Understanding these changes is essential for banking leaders who want to stay ahead of the curve in banking and finance. Here we explore some of the key trends that are shaping this sector.

Evolution of payment forms

We are currently experiencing a monumental shift in how people pay for things. More and more people are moving away from cash transactions and towards card payments, but online payments are seeing the most significant increase. This situation is most evident in industries such as online casinos, where new payment service providers seem to be popping up every day.

Innovative marketing

Marketing is of enormous significance to the banking sector, and this is especially the case when customers change providers. In addition to improved data acquisition, new digital analysis methods are emerging that evaluate this data. From there, new marketing strategies can be born.

Banks will be interested in these opportunities and the effectiveness of individual channels and shortening the path from Advertising to actual business success.

Increased cooperation

Considering that the rate of change will only continue increasing, it’s highly doubtful that even prominent institutes will be able to go at it alone. Instead, forming partnerships of all types will become increasingly important. Some examples of advantages this collaboration can bring about include: expanding into new markets, acquiring new customers, creating new brands, developing innovative uses for existing products/technology, and promoting a positive image.

It’s also worth noting that such cooperation is not limited to just credit institutions. Similarly, fintech technology companies and software developers also have the opportunity to get involved and maximize results via synergies.

Better design

Over an extended period, financial institutions have created a tangible legacy of capital, infrastructure, and customers. But, the flip side is that they often lack speed, innovation, and focus on the user. In addition to the payment service providers already mentioned, this is also why new fintech companies are thriving. They offer services without organizational obstacles or structures, enabling them to act faster and operate in a more cost-efficient manner.

In the future, the design will focus on being simple, fast, and easy to understand so customers can accomplish what they need with only a few clicks. Credit institutions will have to shift their thinking to follow this trend.

Data usage improvements

As the world moves digital, opportunities to collect and evaluate data in new ways give businesses previously unseen insight into customer needs. Instead of relying solely on demographic data and risk profiles, companies can now use different data related to lifestyle characteristics, psychographic profiles, previous financial product usage, buying behavior, and social media activity. Combining this data and targeting it more effectively will result in changes to marketing strategies and improved communication with customers.

Digital banking transformation leaders need to be aware of the current trends in banking to help them predict what technologies will be helpful in the future. 

What is the future of digital banking?

The banking sector is evolving rapidly due to changes in consumer behavior, the rise of new technologies, and shifts in business models. Banks must swiftly begin implementing strategies to stay ahead of the curve and be prepared for banking in 2023 and beyond. Below are eight key trends that are changing the face of banking.

Analytics & data integrity

Data has always been essential, but only recently has it become so plentiful. However, data isn’t always accessible, clean, and integrated. Allowing customer financial data to be seen by third parties will have a significant impact on retail banking as we know it. It will prompt organizations to make tough decisions about their business model and whether they can retain customers.

Security using CyFi (financial crime & cyber risks)

With criminals innovating new ways to commit crimes and regulators continuously tightening the compliance regime, traditional prevention methods are no longer adequate. This lack of protection allows for more financial crime and severely harms the institution’s reputation, as seen by past failures.

Financial institutions must utilize data analytics and artificial intelligence to detect fraud and see potential threats.

Researching new technologies

We are only beginning to scratch the surface of how valuable AI and automation can be. Blockchain has already been a game-changer for businesses, and cloud technology is revolutionizing our operations, especially in investment banking services.

Companies are assessing how they can take advantage of these new technologies, if and where it makes sense to deploy them, and whether they will complement or replace legacy systems already in use.

Going digital and embracing emerging technologies

Consistent and technology-enabled growth is essential for banks to succeed in an ever-changing business world. Many banks are experimenting with digital features such as online banking, but not all have fully adopted these technologies. A strategic  tech stack must be at the forefront of any business plans for expansion if they wish to maintain a solid customer base while delivering a wide range of services via many digital channels.

Promoting an agile culture

The ever-growing pace of technology fosters the rise of new, innovative business models. Currently, the competitive advantage doesn’t come from size but from speed and agility. By 2023 this trend should remain unchanged. To stay ahead of the curve, banks need to accept change openly and use digital technologies to think outside the box to brainstorm in smaller yet braver ways.

Evolving alongside the future of work

How will the future banking workforce look? With technology continuing to evolve and grow, financial institutions must invest in digital transformation initiatives. To remain relevant, how must institutions change their operating models to integrate the digital and human workforce successfully? Furthermore, how can these same institutions retain and grow existing talent in such an ever-changing environment? These are the questions financial institutions will increasingly have to answer to ensure a successful transformation.

Monetizing data and leveraging platforms

As we move closer to 2023, the question of how banks can offer their clients what they need in the way they want becomes more challenging. Data is power, and by harnessing it properly, financial institutions can optimize their products and services to sell in a way that customers desire. To grow, banks must decide how best to utilize platforms and the data at their disposal.

Planning across the entire financial ecosystem

The financial services sector is broadening. In 2030, fintech, big tech companies, banks, and other players will need to cooperate to serve customers better. Each bank or credit union has strengths and abilities which would be helpful to the others. So it will be essential for firms in the ecosystem to have a good strategy for working together – one that’s adjustable as circumstances change. Because different companies will require partnerships with different types of organizations, flexible optionality needlessly complicates things, so each firm should plan how to cooperate based on location.

Begin your banking transformation journey today

The financial services industry is under pressure now more than ever to provide a digital-first customer experience. This complete guide provides an overview of what digital transformation in banking looks like, its advantages, and how to start planning your own institution’s journey.

Whether you are part of one of the many small or large financial institutions, no two banks are alike. But, all stand to benefit from becoming a more efficient, customer-centric, and agile workforce through digitization and practicing more organizational flexibility. Don’t hesitate – begin your banking digital transformation journey today.

Tristan Ovington
By Tristan Ovington
Tristan Ovington, an accomplished senior writer and journalist, typically contributes his expertise to the Enterprisers Project. Renowned for his valuable perspectives on digital adoption, digital transformation, change management, and Cloud applications.