Digital transformation in banking: what is it?

May 9, 2022

Digital transformation in banking is happening across the board -  banks of all sizes are adopting new technologies and services to streamline and improve their service offerings. But what does digital transformation really mean and how is it changing the industry?

Financial institutions have successfully operated for hundreds of years in a face-to face-format. But the path to continuous profitability means that customers have become the focus, and while operating models have stayed the same, customer centricity has become the new norm. 

This ‘new norm’ has created a need for redefined customer journeys. And some of these journeys need a significant digitization overhaul. This can be expensive, time-consuming and disruptive at the best of times, but then the Covid-19 pandemic hit. What was planned took months needed to be done in days; what was supposed to be an aspiring strategic plan, became a mandate overnight. 

The importance of digital transformation in banking

Many traditional banks were already taking their operations digital pre-pandemic. While other industries and new, digital-first fintechs have embraced technologies such as machine learning, artificial intelligence, and cloud computing, the complexities that come with large, global banks and their legacy systems mean that the adoption of new digitized customer journeys poses many challenges. 

The pandemic has only added to these challenges. But it’s created an even greater need for remote experiences - 63% of Americans report accessing more online than at the start of the pandemic1 -.

And it’s not just down to meeting the needs of today’s digital customers. Traditional banking systems are facing increased competition from new, nimble challenger banks, who place an emphasis on digital first. With increased competition comes increasing pressure and need to improve offerings, else lose market share to those who can offer a more engaging and hassle-free customer experience.

The challenges of digital transformation in banking

Banks face a wide range of external pressures. It’s never been more crucial for banks to remain agile and innovate quickly to continue to grow. And an increasing number of challengers and digital-first newcomers have also added to this pressure as they continue to cut into market share. 

Driven by on-demand services like Netflix and Uber, customers expect more from your services than ever. They don’t just want things fast - they want them now. Our research shows that up to 44% of US customers will abandon an onboarding process due to frustrations1.

Consumer desire for simple, quick digital interactions is pushing banks to improve customer experience, streamline their processes, and re-evaluate the size of their branch networks. 

You need to onboard new users remotely, but you also need to monitor the risks to your platforms as your online user base increases. So how do you balance these requirements? 

Overcoming the challenges: three steps banks can take 
  1. Re-evaluate branch networks to stay competitive

The consolidation of US banks along with pressure from new entrants has seen market share decrease. Conventional banks now only account for 72% of the global banking and payments industry, down from 81% at the start of the year and 96% a decade ago2.

According to McKinsey, ‘Advances in technology and changing customer expectations are leading to the collapse of the traditional banking value chain and the emergence of an integrated-network economy comprised of ecosystems. The threat for banks is the loss of the customer relationship’3.

The market is changing, but this provides an opportunity to reinvent. With digital usage increasing, banks need to examine their branch networks. Maintaining excess branch capacity is expensive: branches typically represent 20-30% of a bank’s total operational costs4. 

  1. Embrace the shift to contactless

The Covid-19 pandemic has played a critical part in accelerating our shift towards digital-first experiences. Mobile-banking traffic rose by 85% and online-banking registrations by 200% in the US, during the month of April this year5

This move to contactless banking experiences has been most visible in the payments space. Card payments have grown, boosted by the boom in online shopping and efforts of brick-and-mortar shops to reach customers online6.

Based on The Economist research, it’s thought that the share of cashless transactions worldwide has risen to levels previously not expected until two to five years’ time7. And this change in behavior seems here to stay. In a global survey, Bain found that 95% of consumers plan to use digital banking post-pandemic8.

Banks require new technologies to reshape businesses in line with this shift to contactless. These technologies should serve to upgrade core systems, simplify methods to acquire customers, optimize the customer experience, reduce operation costs, and improve risk control capabilities.

  1. Meet customer expectations with enhanced customer journeys

Changes in customer expectations and behavior are driving banks to rethink customer journeys and adopt new processes.

This was already happening before the pandemic - new generations like Millennials and Gen Z were driving the demand for digital experiences - but this demand has now accelerated. You have the opportunity to enhance customers’ overall banking experience by making digital easy and showing customers how to self-serve9

These digital journeys should be based on customer needs, desires and behaviors. Rather than focusing on individual touchpoints, banks should tackle the complete customer journey that crosses multiple functions and channels. Leading banks are designing holistic digital experiences that include prospecting, sales, onboarding, and ongoing customer service experiences10

Putting customer identities at the heart of digital transformation

At the center of a digitization strategy is your customer. And as you move many of your processes and services online, it becomes even more important to know who your customer is and to verify their identity in a digital scenario.

With a digital identity solution, you can transform how you see your customers and optimize your digital processes.

  • Increase customer acquisition through digital channels. Customers no longer want to visit a branch to open an account. Adding a digital channel as an option for account opening offers customers an alternative. But if you’ve already implemented digital channels, how do you ensure yours is competitive? And if you don't currently offer digital channels, how do you kick start the process? Leveraging an identity verification solution at sign up gives you a scalable onboarding process. 

  • Enhance user experience across customer journeys. Customers expect more from your services than ever, and they expect services fast. With a digital identity solution, onboarding becomes both quick and easy. Plus it will set you apart from the competition. All banks offer the same product at the same price—a new, digital, and more convenient approach will set you apart from the competition. It’s been shown that banks with better customer experience actually grow deposits faster11, 12.

  • Drive efficiency and automation. 60% of operating processes aren’t automated13. Without digital tools, banks are spending huge amounts of money on both their front and back end structures. It’s no longer scalable to manually process and verify each new account opening, or verify customers when they’re making a large transaction. Moments of authentication like these are expensive when you rely on call centers. On average, mobile interaction incurs a variable cost of about 10 cents versus $4 for a teller or call-agent interaction14. But with a digital identity solution, customers can authenticate simply using a selfie. 

  • Prevent fraud and satisfy compliance. Comprehensive identity verification means you can navigate AML regulatory requirements and KYC (read our what is KYC guide to know learn more) at scale. And we all know that fraud can cost your business—identity fraud is a growing threat, particularly online. With a hybrid approach (machine and human) to fraud, you can keep both your business and your customers, safe.

To find out more about how Onfido’s identity solution can support digital transformation, take a look at our Identity Verification page.
















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