Digital Transformation in Banking: Opportunities and Challenges

Ashish M. Shaji

10 Sep, 2022

The banking industry has undergone significant changes in the last few years with digital transformation in banking. FinTech companies have disrupted the market with cryptocurrency, blockchain, and bitcoin. Banks having a progressive mindset have responded to these market disruptions and have expanded their in-house capabilities.  Many others have partnered with fintech to produce new digital offerings. The digital banking transformation of a large organization like a bank is bound to be arduous. However, banks are the first adopters of technology across the globe to ensure an excellent consumer experience. The inception of many technological concepts has improved the customer experience.

Banking goes digital

Digital transformation may look different in every industry. It requires the integration of digital technology into every area of an industry or a business. This integration of technology brings fundamental changes in the operation of the business and delivers value to its customers. Digital transformation in banking has helped in reducing costs and simplifying the process. It has made banking easy and convenient. The end to end integration helps in ensuring seamless and engaging customer experience. It leads to further business transformation with the advent of new digital technologies like blockchain in banking and Artificial Intelligence (AI). 

Banks going digital has affected the banking workforce a few times with automation resulting in layoffs and staff reductions. There has been a growing demand for data scientists with banking experience, which is difficult to find today. The industry must develop a new workforce model to educate existing staff and hire new talent.

How has the digital transformation in banking benefitted?

The digital switchover has benefited the customers as well as the banking industry. The main benefits include:

• Customer service

The customers have been benefitted the most with it. Having a device and internet connectivity can allow a customer to access his bank account and conduct transactions from anywhere and at any time. It saves time and expenses as the customer doesn’t require going to bank branches, and they don’t require standing in the queues for getting their work done. It has definitely made things more convenient and customer friendly.

• 24*7 Availability

Digital switchover of the banking industry has ensured that the banks are available for customers 24*7. The customer can avail his or her bank account to check records anytime and can access a number of banking services round the clock.

• Instant banking services

Another positive impact has been the luxury of instant banking which doesn’t require waiting for a considerable period of time. It has helped in saving a lot of time for the customers.

• Lower overheads

It has also lead to reduced operating costs for the banks. Lower operating costs means more profit for banks.

• Banking benefits

The convenience that is offered by banks has resulted in an increase in the number of customers of banks. This is due to the convenience and reduction in human error in calculations. Records of transactions are maintained electronically, which allows the generation of reports and analysis of data anytime for different purposes.

Disadvantages of digital transformation in Banking

The benefits of digital transformation may be impressive, but there are certain disadvantages that follow the process.

Some of the disadvantages pertain to:

• Security Concerns

This is one of the most critical concerns with the digital switchover of the banking sector. Various companies and institutions have found cybersecurity as the concern that they have not been able to overcome completely. Use of sophisticated software that aims to protect data is not able to provide 100% security from phishing, scammers, hackers etc.

• Services

Right now, there are not too many banks that provide a variety of online services. They may still require your physical presence at the traditional bank branches.

• Transactions

For making complex transactions, your physical presence may be required at the bank branches. Moreover, international transactions are still not possible with all digital banks.

Leveraging technology to reinvent the banking business model

The advent of new technologies with digital transformation in banking allows the banks to strengthen customer engagement with personalized, innovative offerings. Some banks are using blockchain technology to transform their business processes because of its security and convenient alternatives to traditional bank processes. Blockchain has been known for its ability to handle fraud in the financial sphere. It is already being used in the financial instruments areas of banking like payments, private equity asset transfers, for tracking derivative commodities, management of trading, etc.

Blockchain can be used to reduce the processing time from days to a matter of a few minutes. It elevates the customer experience to a new level with reduced costs real-time transactions. Other technologies like machine learning can help in automating the manual processes, fraud management and customer segmentation activities.

Banking on the cloud

Through digital transformation in banking, banks are looking to take advantage of the available market opportunities. Undoubtedly, banking technologies have caused a monumental change in the banking industry. Banks that have embraced innovation and adopted new technologies have the ultimate opportunity to change and grow in how they provide financial services. It must have the ability to collaborate with financial technology partners to develop digital products and must provide the customers with real-time multichannel digital interactions.  It must offer the ability to simplify the process through the optimization and adoption of cloud solutions. It must innovate with disruptive technologies like Artificial Intelligence (AI), blockchain etc.

It is vital that restructuring the business model and processes is done for successful digitization of the bank. Leveraging innovative capabilities in a cloud deployment can speed up the digital transformation initiatives.

Challenges of digital transformation in banking

The future of banking with digitalization looks promising, and it is expected to change the image of the traditional banks and bring more services to the customers. However, there are certain challenges faced by banks that need to be addressed.

• Competition with non-financial institutions

Various non-financial institutions provide banking facilities to the customers. They allow the customers to make transfers directly into other people’s bank accounts, thereby leaving banks out of the picture. However, it may be noted that banks are more regulated; therefore, they are more secure.

• Online payments

Every bank doesn’t support online or contactless payments. The reason why they can’t provide is that they don’t have a secure online platform, resources etc. to make it possible.

• Technologies

The banking system that provides online banking services must be continuously updated so that they may have an adequate security level. The banks must set up a detailed strategy and select appropriate technologies to turn ideas into reality. The process of digital transformation is endless as technologies continue to enhance each day; therefore, it’s important is to stay updated. This could be a challenge with digital transformation. New technologies will bring about new services that must be upgraded and continuously supported.

Digital transformation in Banking: Road ahead for Banks

One of the vital questions in this day and age would be how banks should tread in this digital era?

Well, the banks can follow the following steps for thriving in the digital transformation in banking:

• Embrace mobility

The banks can embrace mobility through mobile applications that not just provide account information but also engage customers or let customers share their financial goals.

• Staying Up-to-date with digital Innovations

The banks can be up to date by embracing new technologies and trends.

• Automation

To increase productivity and customer satisfaction, banks can involve automation wherever it is possible.

• Smart digital solutions

The banks can come up with smart digital solutions like installing self-service stations in bank branches which allows the customers to perform their transactions on their own.

• Multichannel services and human interactions

Even with digital transformation in banking, human interaction can be vital as it plays an active role in gaining customer’s trust and opens doors for new banking experiences. Therefore they should focus on multichannel services and human interactions.

Conclusion

Also, read: Implementation of Platform-based banking