Digital Transformation in Financial Services

Digital transformation in financial services began long before the pandemic had businesses scrambling to upgrade themselves. Many finance leaders have transformed their functions and are midway on their journey to Finance 4.0.

However, these leaders make up 30% of financial businesses implementing a digital transformation strategy in 2021. Around 40% have a strategy but haven’t began implementing it yet. Meanwhile, 27% are developing a strategy and 3% haven’t even started.

The Need for Digital Transformation in Financial Services

Digital transformation for the financial industry is a holistic approach that aims at modernizing financial services. It entails the use of technology solutions to increase agility and resilience while keeping up with the evolving industry landscape.

Other known benefits of digitally transforming financial institutions include making data-driven decisions, reducing costs, and consolidating data and processes. However, different studies indicate that the following are the main goals of taking on this step. 

Achieving Long-Term Success

Realistically speaking, the financial services industry isn’t immune to disruption. From economic instability to increased cyber threats, such issues can easily result in uncertainty and hinder operations.

Digital transformation eliminates the wait-and-see approach most organizations follow. Instead, it empowers them to thrive and be profitable by enhancing their services and customer experience.

Some of the initiatives financial organizations plan to integrate in their long-term strategic vision are –

• New digital revenue streams
• Digitized supply chain
• New payment models
• Expansion into new markets/customer segments

Leveraging Digital for Better Customer Experience

Customer experience is a vital aspect for financial institutions, especially as it creates customer loyalty and builds a competitive advantage. That’s why this is the second highest digital priority for members of this sector, after optimizing processes and ensuring operational efficiencies.

Operational changes post COVID-19 are further fueling changes to customer experience. Some of the changes companies currently prioritize include –

• Efficient e-Commerce
• Digitization of customer service/customer experience
• Use of self-service
• Contactless delivery options

Keeping Competitive Disruption at Bay

Financial institutions are experiencing increased competition, especially from industry outsiders such as fintech players and tech-focused companies. Therefore, they can’t ignore digital disruption any longer.

However, financial service providers aren’t only embracing digital capabilities and services. They’re taking even stronger measures such as –

• Delivering upskilling programs
• Transforming the organization as a whole to become Agile
• Shifting to the cloud/becoming cloud-native

Transforming Operations and Unlocking Value

Financial institutions have the critical responsibility of ensuring the completeness and accuracy of data. However, EY reports that only 22% have been doing so without significant human intervention. Moreover, only 33% can ensure timely execution.

With digital transformation in financial services, technologies like artificial intelligence (AI) and blockchain can introduce new opportunities, especially in the following –

• Management Information System reporting (MIS) and analysis
• Day-to-day transaction accounting
• Financial Statement Closing Process
• Budgeting
• Preparation of information used in audits
• Tax compliances
• Internal controls
• Corporate treasury operations

The first three of the above are the top three priorities majority of institutions plan to automate and optimize.

The Challenges Slowing Down the Digital Transformation

Despite being aware of what needs to be done, financial institutions are yet to achieve it. According to most, four challenges are especially harder to overcome in this industry.

1) A Convincing Business Case to Ensure Funding

While most CXOs are well aware of the benefits digital transformation has to offer, they may be reluctant to take this step without a strong business case.

This document defines and quantifies the business benefits from digital investments. It further highlights performance measures and targets for each area this investment impacts. This makes it stronger than traditional ROI models as they don’t effective capture the benefits organizations can receive.

Another important role that a business case plays is articulating which areas the initiatives will impact and further consequences. This will help CXOs have a stronger grasp on how each investment affects the enterprise as a whole and what outcomes are achieved.

A business case further links the overall outcome of the transformation journey to strategic goals. It also provides the key trends and business pain points in an industry or sector. Finally, it provides a clear execution map and defines a comprehensive data management strategy or operating model.

2) Change Management to Ensure Employees Adapt to New Technologies

Without employee adoption, any initiative to spur digital transformation in financial services will end up gathering digital dust. Plus, it won’t deliver promised results or anticipated ROI. This will lead to the failure of the whole journey.

Therefore, organizations need to ensure change management and organizational agility. Even if you choose to ignore pushback to change, you’ll only be adding to their resistance.

To help overcome this challenge, financial organizations can employ the following steps.

• Use a Technology Acceptance Model – Unfortunately, business leaders end up becoming hyper-focused on the business value. Instead, you should use the technology acceptance model to demonstrate how the new tech addresses end users’ pain points.
• Include Everyone in the Decision – Various functions will have different concerns; so, you need everyone’s input to best address them.
• Start in Advance with an Internal Campaign – Since you need to sell this to employees, you should launch it with a bang. Get people on board who can excite employees about what’s to come. Make sure to also customize communications.
• Train Everyone – Ensure everyone is properly trained to use the software. However, customize this training according to specific roles, teams, or departments for more value.

3) Choosing the Right Implementation Partner

According to BDO, only 15% are acquiring companies that have the capabilities they desire to add. Meanwhile, 25% have ‘outsourced IT’ as their goal for the upcoming years. However, how to outsource such critical data processing just to anyone?

That’s why there’s a need for choosing the right implementation partner.

The right partner can also provide guidance and ensure controlled monitoring. That way, they can enhance the chances of successful software adoption and integration. To select one, take into consideration the following –

• Relevant expertise with the scope of the solution you have at hand
• Ability to match the scale of your project, especially while partnered with similar businesses
• Flexibility and ability to accommodate change during implementation
• Reliability and reputation within the IT industry
• Cultural diversity to match your own diverse workforce
• Willingness to provide ongoing support to minimize future risks and challenges

4) Leadership Buy-In

The success of digital transformation in financial services or any industry for that matter is dependent on leadership buy-in. Without it, they won’t be aligned with the initiative and the company’s journey may not end up in long-term success.

Buy-in ensures that all leaders are on the same page and willing to cooperate to prevent any issues. The involvement of leaders further allows them to show their support and lead by example. Moreover, it ensures the organization’s commitment to clear and effective communication.

Here are five suggestions that can help you overcome this challenge.

• Demonstrate a strong ROI. If your organization isn’t using the Agile methodology, consider proposing that your financial institution embraces it. That’s because Agile uses ROI to determine which job gets done next.
• Keep leadership in the loop and involve them whenever you can.
• Engage, inform, and delight your leadership using digital. There are many opportunities to do so to avoid alienating non-technical personal.
• Work around leaderships’ self-interest and make sure they receive credit for their role in your digital transformation journey.

Technologies to Consider While Digitally Transforming Financial Institutions

Now that you have a better understanding of digital transformation in financial services, you may be curious about the technologies used. The following are the most in-demand digital tools for this industry.

Cloud Computing

Cloud computing is an on-demand service that provides access to shared resources, storage, or application via the internet. As one of the older digital transformation technologies, 83% of financial institutions have already implemented it and are reaping benefits like –

• Providing better customer experience via customer relationship management systems and anytime, anywhere access to banking services
• Reducing costs by moving data and applications to the cloud
• Ensuring fast performance even while handling large amounts of data
• Greater scalability, and therefore, flexibility to best serve clients
• Maximizing security of data against data breaches and other attacks
• Meeting regulatory compliance requirements when leveraging compliant cloud platforms
• Analyzing large amounts of data to detect suspicious and fraudulent activities

Data Analytics

Data analytics plays a vital role in helping make sense of raw data. It entails applying statistical analysis and technology on data to spot any trends and identify solutions to problems. It further related to business intelligence, ensuring better decisions are made to better business.

As part of a company’s digital transformation in financial services, data analytics offers the following benefits –

• Improving decision making by turning structured or unstructured data into insights
• Helping finance teams gather information that enables them to gain clarity on key performance indicators
• Detecting fraud and similar problems while scrutinizing and comprehending vital metrics
• Using data effectively to ensure the success of financial institutions

Enterprise Resource Planning (ERP) Software

Majority of digital transformations include ERPs. The same applies to digital transformation in financial services as the system ensures less room for errors, lower operation costs, close monitoring, and enhanced customer experience.

Here’s a video of DPL’s CEO and co-founder explaining ERPs’ role in digitally transforming an organization.

Artificial Intelligence (AI) and Machine Learning (ML)

AI and ML are Industry 4.0 technologies that have been pioneering new growth opportunities in fintech. In fact, they’re part of the digital transformation in financial services for over 61% of organizations, with 35% planning to implement them soon.

From financial monitoring to algorithmic trading and all the way to financial advisory, there are many use cases for these technologies. They also provide the following advantages –

• Improving predictive models by removing human bias
• Enhancing fairness in dealings such as loan servicing areas by complementing human intelligence
• Saving the time otherwise wasted in manual processes and complex decision making
• Handling large sets of micro-segments, and therefore, improving conversion rates and targeting
• Understanding customers better to engage them more effectively
• Preventing fraud by identifying patterns of illegal transactions which humans may miss

Internet of Things (IoT)

The idea that IoT development can benefit financial services may be hard to wrap your head around. After all, the latter deals mostly with the intangible. However, the network of connected devices and technology can be transformational to the industry and its members.

Financial institutions can leverage IoT for making IoT payments without human intervention. IoT devices can also be used for customer service, credit risk management, and even auditing.

In addition to improved, faster decision-making, including IoT in your digital transformation in financial services ventures help with –

• Tracking employee and business performance in real-time
• Streamlining finance and accounting (F&A) processes across different departments
• Collecting data from multiple teams, therefore saving time and effort

Blockchain

Another Industry 4.0 technology, blockchain is a technology that grew popular due to its crucial role in cryptocurrency systems.

A blockchain is a distributed database that’s shared among multiple computer network nodes. It maintains a secure and decentralized record of transactions, ensuring their fidelity and security.

Around 38% of digital transformation in financial services initiatives have implemented blockchain. Meanwhile, 55% plan to do so soon. Why, you ask? For the sake of these benefits.

• Adding transparency as blockchain employs mutualized standards, protocols, and processes across a network
• Simplifying collaboration and data management without compromising on trust
• Creating and executing smart contracts that are tamper proof
• Providing granular privacy to allow selective data sharing in business networks
• Sustaining hundreds of transactions and periodic surges while delivering high performance

Still Curious About Digital Transformation in Financial Services?

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