Banking’s Delusions Of Digital Transformation

OBSERVATIONS FROM THE FINTECH SNARK TANK

The banking world appears convinced that the Coronavirus crisis has helped accelerate the digital transformation of banking:

• A press release from Boston Consulting Group titled COVID-19 Set to Radically Accelerate Digital Transformation in the Retail Banking Industry offers up the proof point that, post-crisis, 25% of consumers plan to make less use of bank branches or stop using them altogether.
• According to The Financial Brand, “the new normal of banking is quickly moving from branch-heavy, product-centric organizations with legacy technologies and cultures to consumer-centric organizations with more personalized solutions that can be delivered seamlessly.”
• RTInsights writes: “Led by employees working remotely and customers increasingly doing their banking online, digital transformation is accelerating in the banking sector as a result of COVID-19.”

What Is Digital Transformation, Anyway?

These perspectives are flat-out wrong and/or miss the point of what digital transformation is.

For starters, the relatively small minority of consumers—25%—who plan to make less (or no) use of branches going forward is a pretty weak argument for transformation. Who says that they won’t start using the phone to make voice calls to call centers more often?

Second, banks are not “moving quickly” to providing “personalized solutions that can be delivered seamlessly.” That simply doesn’t happen in a three-month time frame, and especially during one when financial institutions are scrambling to adapt to a crisis.

The examples cited above fail to meet the definition of digital transformation—at least as defined by bank executives themselves. In a 2019 study conducted by Cornerstone Advisors, execs were asked which of three possible definitions of digital transformation resonated the most with them. The definition capturing nearly 80% of the vote was:

“Integration of digital technologies into all areas, fundamentally changing how to operate and deliver value, and a culture change that continually challenges the status quo and gets comfortable with failure.”

Bottom line: Reductions in branch usage, incremental adoption of digital banking tools, and bank employees working from home don’t come anywhere close to qualifying as evidence of digital transformation.

Four Requirements For Digital Transformation in Banking

For digital transformation to occur—or even accelerate—in banking, four things need to happen:

1) Complete overhaul of legacy technology. In an industry with a poorly-established technology infrastructure, transformation can be accomplished relatively rapidly. But the banking industry has a long history of technology infrastructure, starting first with mainframe-based systems supporting back-office functions and then online systems that have enabled customer access.

In the Cornerstone study, nearly 70% of respondents said that their institution’s current technology infrastructure was a barrier to digital transformation. The other 30% must have misunderstood the question.

While there are some innovative approaches in the market to help integrate with and build on top of existing core systems, banking’s digital transformation won’t happen (or even accelerate) until a larger percentage of institutions have replaced legacy core systems with cloud-based solutions.

2) Maturation of AI. Is there anyone who thinks artificial intelligence (AI) won’t have a big impact on banking? I doubt it.

But the reality is that AI—in a banking context—is not very mature. AI in fraud and risk management has made significant gains—but keep in mind that AI has been used in systems supporting those functions for decades.

AI for marketing and customer support is far less mature. How can banking “accelerate” digital transformation when a key transformational technology isn’t very good?

Bank of America announced that Erica, its AI customer support tool, added 1 million users per month from March through May to reach a total user count of 14 million.

I’m one of those users. I’ve tried using it three times. “Tried” being the operative word. It didn’t correctly understand my question two of the three times and gave me a nonsensical answer the third.

Digital transformation my foot.

The banking industry will achieve digital transformation when AI is embedded and integrated into the range of applications and systems that support both back-office and customer-facing functions.

We’re not anywhere near that today, and we’re not even “accelerating” towards it.

3) A new generation of senior execs. Dear Executives: I have seen the problem, and it is you.

Among the execs surveyed by Cornerstone, 85% said “corporate culture” was a barrier to transformation.

The problem isn’t the underlings who “just don’t get the need for change.” The problem is that, with 30 to 40 years of industry experience, many of the current set of leaders have developed deeply ingrained beliefs about how the industry works.

While there is a growing number who recognize the need for their own beliefs to evolve, this is a lot easier said than done.

Back in the 1980s, many organizations were slow to adopt personal computing. The real uptick in usage didn’t happen until Baby Boomers took over the C-suite.

Digital transformation in banking isn’t going to happen until the Gen Xers and Millennials dominate the executive committee.

4) More shocks to the system. If we see a V-shaped recovery following the Coronavirus crisis, kiss the notion of any acceleration of digital transformation in banking goodbye.

Good times foster complacency in most organizations. A speedy economic recovery will make most banks more than happy to take their feet off the digital transformation gas pedal.

While pandemics are an extreme example of a shock to the system, the banking industry will need more shocks—like economic downturns, new technology innovations, regulatory changes—to keep the digital transformation engine going.

The Path to Digital Transformation

In reality, the path to digital transformation isn’t—and won’t be—a straight line. We’ll see periods of faster transformation followed by slower periods as institutions reach and adapt to changes.

The pundits who think it will be a fast process are fooling nobody but themselves.