Embracing Digital Transformation in Banking: Should or Should Not?

Digital transformation is no longer a new concept to people since it appears in all domains, from healthcare and education to logistics and agriculture. In each sector, digital services are applied in different ways to bring about a modernization revolution with positive impacts.

Despite the various benefits that digital capabilities bring to diverse sectors, banking is considered one of the most challenging industries in which to integrate new digital technologies. Resistance to change, strict requirements of data security, higher presence of legacy IT infrastructure leading to increased technical debt, and organizational structure complexities are fundamental factors slowing down the pace of banking digital transformation.

Weighing the pros and cons, can embracing digital transformation in banking really solve the existing problems in traditional banks without affecting the quality of financial services? Find the answer for yourself by reading the article below.

What Is Digital Transformation in Banking?

Digital transformation in banking refers to the multifaceted process involving integrating digital technologies and innovative strategies into every corner of the banking services sector. By leveraging modern technology, financial institutions revolutionize customer interactions, internal bank operations, and overall banking experiences to maintain competitive advantage in a rapidly evolving marketplace.

Banking digital transformation is not limited to adopting technological advancements such as artificial intelligence, machine learning, cloud computing, big data analytics, and financial operating models. Instead, it is also the act of using digital channels to quickly and conveniently reach the target audience and, accordingly, gain better customer satisfaction and engagement.

One of the typical examples of digital strategies in banking is the use of chatbots to provide 24/7 customer care services instead of barely relying on human intervention.

What Are the Key Drivers Behind the Digital Banking Transformation?

According to the State Bank of Vietnam, the banking sector has invested over 15 trillion VND (617.6 million USD) in digital transformation by the end of 2022. This number still shows no signs of slowing down due to technological advancements in recent years. But why do businesses, regardless of size, still embark on this path of modernization even though only 30 percent of banks report successfully implementing their digital strategy? The key drivers behind digital transformation in banking below may give you some clues.

Changing Customer Expectations

Customer behavior and requirements are increasingly complex and diverse. If, in the past, individuals used banks only for receiving and transferring money, today, they expect financial institutions to provide services that are tailored to their unique needs and highly personalized to improve their overall banking journey.

Banking apps must be easily accessible across various channels. Customer care service must be available 24/7. Account security must have a face ID. Once the need for digital convenience, personalization, and efficiency is not met, they are likely to switch to other, more suitable options. This is indeed a primary driver for banks to adopt digital solutions and transform their traditional operations.

Increased Use of Mobile Devices

With the advent and widespread adoption of tablets and smartphones, modern customers increasingly favor the convenience and accessibility offered by mobile banking apps to address their financial service needs.

Instead of going directly to the bank during business hours, users today tend to turn to their mobile devices whenever they are to perform banking activities, including checking account balances, transferring funds, and depositing checks. This surge in mobile device usage caused many banks to transform and develop their own mobile banking solutions to provide customers with on-the-go access to their accounts and services.

Rise of Open Banking

Financial service providers no longer operate individually like the previous day, with the introduction of a new concept called open banking. Open banking mandates banks to enable the secure sharing of their financial and user data through open banking APIs between authorized third parties, thereby creating interconnected ecosystems where different entities collaborate to provide more comprehensive solutions to customers.

However, without adopting digital transformation in banking, a specific bank cannot participate in such digital environments, further driving the demand for mobile banking services within the financial industry.

Then vs. Now: The Ultimate of Digital Technologies in the Banking Industry?

You will only realize the great benefits that digital transformation brings to the banking industry once you think back to the past - the period when traditional banks dominated. The shift in financial business models toward modern technologies not only addresses existing banking limits but also opens up opportunities for enhanced services and a wider customer base. Then vs. now. How has the sector improved with the support of technological advancements?

The Limits of Traditional Banks

Looking back on the past when mobile banking apps did not exist, what difficulties did traditional banks experience in management, operation, and customer care?

Manual Processes

If you have visited any physical bank branch in the past, it is not difficult to realize that most of the processes there, from document storage and data entry to customer queries, are carried out manually. While once the cornerstone of financial operations, these time-honored practices now represent significant challenges in an era where speed, convenience, and accuracy are paramount.

Paper-based documentation consumes resources that could be used more effectively for other tasks. In-person interactions often result in slower processing times and delays in accessing services because of their complete dependence on human factors. Manual record-keeping is time-consuming and easily introduces a higher likelihood of errors in the banking workflow. All of the above problems seriously affect the bank’s reputation and diminish the customer experience.

Limited Accessibility

In traditional banking, customers are required to visit physical branches to handle financial needs, which include transaction settlements, account management, and loan approvals. The reliance on brick-and-mortar locations as the needed touchpoint for customer interactions creates barriers for individuals who value convenience and flexibility or those with mobility constraints and busy schedules. Instead of having the right to proactively process common transactions anytime, anywhere, customers are forced into situations of lack of accessibility, such as long wait times and limited operating hours, negatively affecting the service experience.

Security Challenges

Not any super secure system, traditional banking mainly relies on physical documents and manual verification like signatures to verify identity and process tasks. However, these conventional security and document storage forms are deemed to have inadequate risk management levels.

Manual verification processes not only increase human risks, such as misplacing documents and mismatched signatures, but also create opportunities for malicious actors to exploit gaps in the security system, potentially leading to reputational damage, financial losses, and legal consequences in the event of security violations or compliance violations.

Less Personalization

Traditional banking institutions have previously feared a one-size-fits-all approach to customer care regardless of segment. By providing all users with the same standardized product and service offerings without taking their personal levels into account, banks miss the opportunity to build solid relationships and foster customer loyalty.

The lack of data analytics and client insights also makes traditional banks struggle to understand customer behavior and lifestyle choices, making it difficult to offer customized recommendations, relevant marketing strategies, and cross-selling plans that align with individual needs.

How Digital Technologies Transform the Banking Sector

However, with the introduction of innovative digital platforms and technologies, the banking industry has improved and ultimately overcome the limitations of traditional financial institutions.

Expand Customer Base

Visting physical banking is no longer the only way to perform financial activities as tech-savvy users who prefer the flexibility of digital interactions can use digital banking solutions anytime, anywhere to access financial services. Through digital channels such as mobile applications, online banking platforms, or social media, banks expand opportunities to connect with a broader audience beyond traditional brick-and-mortar branches.

As physical banks still exist alongside digital channels and platforms, business owners now have a greater advantage when acquiring both traditional and modern customer bases at the same time. The growing customer base is the basis for the bank to continue to develop further in the future and stay competitive in the dynamic financial landscape.

Enhance Overall Operations

Digital transformation brings a breath of fresh air to the banking industry and improves the overall operational efficiency of financial facilities, from internal activities to customer services. Integrating automation processes helps banks minimize manual tasks that require human intervention. By eliminating traditional banking practices that consume a lot of time and effort, financial institutions promote operational efficiency, speed up transaction processing, and minimize manual errors.

Instead of one-size-fits-all customer service, digital transformation empowers banks to take advantage of the Internet of Things and big data analytics to collect and turn raw customer data into valuable insights used for personalizing the banking experience. Thanks to technological advancement, businesses can launch new products such as digital payments, online financial management tools, and instant money transfers to expand their service offerings beyond traditional banking products.

Stay Compliant

Regulatory landscape and industry standards are becoming increasingly complex in protecting user rights, maintaining the legal corridor, and limiting the attack of cybersecurity risks. By embracing digital technologies, financial institutions can automate compliance processes, including KYC and AML checks, to enhance accuracy and reduce the risk of human error, thereby bolstering overall regulatory adherence.

Advanced features and security measures such as auto auditing, encryption protocols, secure authentication mechanisms, and monitoring tools add extra layers related to data protection and privacy regulations, helping bank providers stay confident in the digital age.

Employee Productivity

Repetitive tasks in banks such as data entry, customer queries, report generation, etc., once the responsibility of employees, are now reduced thanks to the application of modern technology. Instead of repeating routine operational activities, which may cause employees stress and burnout, bankers can completely free up these valuable resources and create conditions for them to charge other more valuable core competencies. By automating a portion of the processes and effectively manualizing the rest, financial institutions are likely to double employee productivity and overall performance.

How to Start Your Digital Transformation Journey in Banking

1. Establish the objectives you wish to achieve through digital transformation.
2. Compare your current product offerings with competitors’ to identify areas for improvement.
3. Access your cultural characteristics to ensure digital transformation improves product weaknesses while preserving positive aspects.
4. Analyze customer journeys to identify opportunities for optimization.
5. Set software development KPIs.
6. Assemble a development team or consider outsourcing if needed to drive digital transformation efforts.

Although the wave of digital banking apps is strongly dominant, bank branches remain an indispensable component in each country’s financial and economic system. Simply put, digital transformation in banking doesn’t mean that traditional banks will be completely eliminated. Instead, the maintenance and development of traditional banking chains, combined with the integration of advancements in digital technologies, is a solid foundation for the industry revolution.

Integrating a new technology into existing systems is a daunting task. Lack of specialized knowledge and market trends can easily make you fall into the path of failure at the expense of money, effort, and time. To ensure the final outcome meets the needs and direction of the project, consider asking for help from experts like Orient Software. With a customer-centric approach, we are not only committed to quality but also customer satisfaction. Contact us to get a free quote.