Bank digital transformation part 1- intro to digital transformation
What is digital transformation & why it’s relevant (putting some context)
Digital transformation, is the change associated with application of digital technology in all aspects of life and society. In the simplest term, it’s the move from physical to digital. It’s usually used in business context: by use of digital technology to simplify, save money, and or speed up processes.
Typical digital transformation framework:
There are 2 levels of digital transformation framework: strategic & operational.
Strategic framework:
Strategic framework is more methodology and direction:
1. user experience
2. process digitalization
3. new business / innovations
User experience:
This is a typical, generic, simplified digital transformation framework. Usually starts with user experience improvements, and there is a good reason why. A typical bank with legacy systems and departments running in silos often results in digital transformation projects running several years and cost 10s to even 100 of millions. Hence, it’s important to set mini-milestones and show early wins. Out of the 3 areas in the framework, user experience is the area that can show the most difference and easiest to implement. It’s the lowest hanging fruits.
Process digitalization:
Once the front end has been updated, a true user experience / transformation is not completed without the support of backend processes. For example, account opening or loan approval if not instant, may not meet user’s expectation.
Process digitalization consists of 3 parts: hardware, software, and process. Hardware and parts of the infrastructure software (ERP, CRM, Web server) has been migrated to the cloud. Removing physical server storage, maintenance, security, utilization issues. This allows company to focus improving on existing processes and software around them.
New business / innovations:
The third one is new business / innovations. New business is the hardest, and I don’t think it’s required in every digital transformation, but innovations will be. Let me explain. New business usually applies to companies facing seismic shift in their industry, forcing these companies to come up with new business models to survive.
Example of companies that failed because they failed to transform: blockbuster facing Netflix, Kodak facing digital photos, Nokia and Mortorola facing smart phones (iPhone), CD facing itunes.
Example of companies that succeeded: BestBuy — transformed traditional retail model to display space for brands. Also focused on electronic services and fixes.
Innovations are when there is no fundamental change to the underlying business, but coming up with innovative ways to deliver, experience, or solution services to customers. This would apply to banking.
Examples:
Embedded banking: Capital One integrated with Alexa to do bank transaction
Connected banking: Open banking & API initiatives
AI: chatbot, fraud detection, customer preference /offering customization
Operational framework:
Operational framework is more or less a blueprint of how to carry out digital framework. Again, there are many different ones, but I think the basic framework/theory does not differ much. I broke it down into 6 steps:
- Formulate digital strategy: What business objective you are trying to achieve
a) Quantifiable goals
2. Analyze current digital state: (identify the starting point)
a) Market: what is the market doing
b) Competitor: What is our competitor doing
c) Company: Where is our digital brand positioned?
d) Within company: what is the company’s technology capability
e) Functional: is the business & support function sufficient to support the requirements of the new digital strategy
f) Org: is the organization & staff ready?
3. Design future digital state
a) With capabilities required
4. Define transformation program
a) Assess the gap between current technical and operational capabilities and desired state.
b) What is needed to close the gap.
c) Ideal if gaps are quantifiable, with business value and risks.
d) Group the initiatives into digital transformation program
5. Financial model
a) Cost benefit analysis
6. Program management
a) Execution of the identified initiatives
b) Governance
c) Review against strategy
d) Review and improve
Now that we have layed the groundwork, in the next article, we will go into the exciting stuff, how digital transformation affects the financial industry, and how the players will and should evolve.
