A C-suite guide to digital transformation in banking

A C-suite guide to digital transformation in banking

January 12, 2022

Darya Shmat

Banking & Financial Technology Consultant

In an era of companies trying to mimic the popularity of titans such as Netflix or Apple, it is not surprising that customers have been spoiled (in a good way) by the all-permeating digitization which has set a very high bar for customer experiences. Modern consumers are tech savvy and expect the same level of personalization, speed of service, and usability from banking software development as they do from the litany of apps clamoring for attention on their devices. 

As a result, the banking industry has seen a significant increase in resources dedicated to digitally transforming an industry that has remained stagnant for the past few decades. The invasion of neobanks and various innovative fintech companies has placed the obsolete practices of traditional banks in the spotlight.

While banks have long been aware of this pressing need for change, the pandemic made apparent that the functionality and user experience of digital banking channels are insufficient to keep satisfying customers’ needs. At the same time, it allowed both banks and many customers to realize that a digital-only relationship may not be just an alternative, but a more effective way of conducting operations. The pandemic also revealed that banks can adapt their operating models much faster than they ever thought possible, as even those with comparatively immature digital environments have managed to meet emerging customer needs.

Banks’ short-term reactions to the Covid-19 crisis

Despite efforts to adapt to customer needs on the fly, the majority of financial institutions are still lacking clear digital transformation plans and struggle to determine where exactly to allocate their efforts and investments. 

State of digital transformation journey

Let’s figure out what digital transformation in banking means and the different ways to accelerate it. 

Core system modernization 

Undoubtedly, the most significant barrier on the way to digital transformation for banks is their legacy core systems. While nimble fintechs are releasing new features almost daily, their older counterparts have to spend a lot of money on legacy system maintenance. Core banking systems are not only slow and cluttered but also very inflexible, meaning that they are not compatible with many new technologies and features. 

What’s more daunting is that the maintenance costs of core banking systems will only increase. Given that legacy technology experts are now reaching retirement age, talent scarcity can soon become a real problem. At the same time, updated IT environments attract a younger workforce, making it easier to find new talent. 

In the context of digital transformation, a new, cloud-based core banking system that enables innovation and hassle-free feature releases can be the best substitute for legacy infrastructure. For example, you might consider moving your on-premise systems to a cloud platform like Amazon Web Services (AWS). By following AWS migration best practices or similar guides if you choose another provider, you can quickly migrate your workloads to the cloud and thereby increase your overall business efficiency.

The reluctance of banks to embark on a core banking system modernization journey can be largely explained by the ensuing significant disruption of operations and extremely high costs of system replacement. Conventionally, banks had two options: replace the whole system at once or keep spending increasing resources on maintenance. Fortunately, with substantial advancements in cloud technology, banks can now innovate and add new features to address the most pressing customer needs and accelerate digital transformation while keeping legacy systems for all other essential operations.  

Next-generation cloud-based and service-oriented architecture models are also compatible with a range of external systems through APIs. This cloud-based approach to core system modernization is less risky and much cheaper than opting for full system replacement. When it comes to digital transformation, some institutions go even as far as building a new brand around their cloud platform, while others choose to gradually migrate legacy data to the new platform. 

While on paper the augmenting legacy system seems to be far superior to full system replacement, the latter can still be a preferred solution in some cases. Undoubtedly, going all-in on system modernization requires more resources, a much clearer long-term vision, and involves significantly more risks, but it also can be a crucial source of competitive advantage. When done right, full system replacement allows banks to implement some features faster than if they chose a gradual system migration. To determine the right approach, a bank needs to granularly assess its data architecture, ascertain  its market position, define customer needs, and establish both current and long-term goals.  

Mobile app improvement

According to the 2021 study Innovation in Retail Banking, 90% of financial institutions consider mobile channel user experience as their top priority. This is hardly surprising, as the general trend is that more banking interactions take place online and via mobile devices than through ATMs and physical branches. It’s critical to note, however, that this steady increase in online activity can only in part be attributed to the sophistication of online banking services. A general increase in the availability of smartphones and other mobile devices is likely to play the most important role here. 

 Mobile experience and analytics are top concerns for banks

Most incumbent banks’ mobile services still revolve around simple informational and transactional services like transferring money and checking account balances. This is, perhaps, the most telling difference between traditional banks and technology-driven neobanks, that  have been offering a range of mobile banking services for nearly a decade. While there are now some banks that provide the ability to, for example, apply for a loan via digital channels, the majority of consumers still prefer going  to a physical branch to do it in person. 

Most importantly, instead of simply offering services via digital channels, neobanks are actively encouraging customers to leverage their online services. They send notifications regarding customers’ spending patterns, offer location-based loyalty discounts, and provide personalized banking. This plays a huge role in cultivating digital engagement among consumers and adding value to digital transformation. 

According to Deloitte's research, which analyzed 14,000 banking customers from around the world, there is a positive relationship between digital usage and emotional engagement. In essence, this means that consumers who heavily rely on digital banking channels to conduct various operations have a deep emotional connection to their bank and are willing to recommend it to others. This customer segment uses mobile devices and online services to transfer funds, pay bills, order new debit cards, apply for personal loans, etc. 

Retail industry giants like Amazon have realized this and built their entire business models around the idea of maximizing engagement by providing superior digital experiences. Customers prefer these companies’ services over the others because their digital service offerings have proven to be of the same quality or better than the physical service offerings of other companies. When you can use a digital service of the same level of quality as its physical counterpart, why bother spending time and effort visiting a brick and mortar location ? This is exactly what banks need to help their customers to realize. Here are a few suggestions to make it happen: 

Making your banking app a super app

In the era of digital transformation, mobile banking is becoming the main touchpoint between banks and customers, which is why it’s critical for mobile banking apps to provide an effective user experience and a wide range of functionalities. In the traditional banking ecosystem, in the best-case scenario, mobile apps offer the same services that customers can access in branches.

Fintechs, on the other hand, have been able to continuously expand their market share by integrating multiple services in one app which can serve as a one-stop platform for personal finances. 

According to a recent study by EY, consumers that choose incumbent banks as their main financial service provider maintain an average of 2.5 relationships with other financial services. For banks, this is both a threat and an opportunity. It implies that customers are willing to use multiple apps to meet their needs and that a one-stop financial solution can prove a significant market differentiator and an effective channel for digital customer engagement. 

Such all-in-one mobile banking platforms can not only combine all essential financial services like checking accounts and investments, but also offer tailored personal finance management. Having access to customers’ financial data, a bank can provide individuals with increasingly sophisticated financial advice based on their goals and lifestyle choices, helping to improve their financial wellbeing. 

While there are currently far more such product offerings from fintechs, incumbent banks have a better starting point to create such ecosystems as they are universally more trusted financial institutions. What is more, not all banks have to create these solutions from the ground up. Depending on the organization’s readiness for digital transformation and market position, integrating with already existing ecosystems built by neobanks may be a better approach. While monetizing these relationships can be difficult, the end goal to provide more value to customers will be reached. 

Increase security

One of the biggest reasons for customers’ reluctance to go embrace digital transformation is rooted in concerns about mobile banking security. In some of the developed economies cited above in Deloitte's research, the traditional banking infrastructure is so engraved in the average customer’s mindset that virtually anything that disrupts the status quo seems like a potential security threat.

This is why it’s crucial for banks to significantly enhance their mobile app security (for instance, using artificial intelligence in cyber security) and actively advertise such features to particular customer groups. Biometric authentication and voice recognition are cornerstone technologies in this context. Such monumental consumer mindset shifts never happen rapidly, which means that companies should have long-term strategies. 

Consumers' mobile banking app features preferences

Highlight the convenience 

Regardless of how sophisticated and convenient a digital infrastructure can be, it may be hard for some customer groups to see. Therefore, it’s crucial to increase awareness of the advantages that mobile banking and digital transformation can bring. For example, banks can develop specialized online training programs to educate new users how to use digital banking tools. Especially during the early stages of digital transformation, it’s paramount for bank employees to actively promote the advantages of the digital approach to banking when interacting with customers via conventional channels to accelerate the adoption of digital banking channels and digital transformation in general.  

Most respondents prefer traditional banking channels

Personalize product and service offerings

Deciding what features to equip a mobile banking app with should come down to identifying the most pressing customer needs. The previously mentioned study by EY also confirms Deloitte’s findings  about the importance of data security and privacy, making it a top customer concern. But the ability to claim benefits associated with savings, payments, loyalty programs, and rates also rank high among customer priorities. 

Factors influencing purchase decisions and consumer interest in benefits

However, generic products and services will no longer suffice. As EY’s research shows, especially when it comes to Gen Z consumers (a group with the biggest customer lifetime value), product offering personalization is the most effective way of deepening bank-customer relationships. In this context, providing relevant product and service offerings at the right time is the key to winning customer loyalty. 

It’s critical to note that depending on the region and demographics, customer preferences can vary significantly, so banks need to conduct rigorous research to understand what product offerings will be relevant in each particular market. 

Providing fully virtual experiences

While the rise of virtual banking may also be attributed to the pandemic, these one-stop digital platforms that offer the same services as physical branches have also become a popular choice for many clients that require remote service access. Virtual banking branches allow customers to have a video chat with banks’ representatives, collaborate on documents and submit them, track their finances, optimize record-keeping for corporate clients, and, essentially, mirror the experience of physical locations . 

What is more, through virtual banking platforms, banks can offer the same level of service to all customers regardless of their lifetime value. 

The adoption of virtual banking platforms can help banks drive customer loyalty and accelerate digital transformation. Also, when such platforms become preferred options for services and transactions in the future, banks will be able to seamlessly transform their existing real estate  into experience centers and branded collaboration hubs.

Reimagining investment strategies

Considering constantly shifting customer needs, competition from fintechs, and an unpredictable business landscape, financial organizations also need to reshape their cost management strategies to enable continuous investment in innovation. For many banks, this is a dramatic change, since they see cost reduction as the only way to generate the funds necessary to drive transformation.

Average RoE of top-50 global banks

However, rethinking investment strategies goes hand in hand with digital transformation projects. For example, core banking system modernization often leads to process automation, including RPA in banking, and elimination of processes that provide little to no value, leading to considerable cost reduction. 

One of the ways to always have enough budget for innovation is outsourcing non-core activities to third-party vendors. In today’s business environment, where regulation is becoming increasingly more complex and technology is changing too rapidly for companies to adapt, turning to external service providers becomes a better alternative  than spending internal resources on keeping the business running. By outsourcing the most resource-intensive operations like tax and compliance to domain experts with dedicated technology stack, banks can not only maintain effective operations but also save money in the long term. At the same time, it’s important to account for IT outsourcing risks and ensure that your company’s vision and values align with a vendor’s approach.


In any shape and form, banking digital transformation is a risky initiative, which requires significant investment and strong leadership. While the aforementioned recommendations are fundamental to digital transformation, depending on organizations’ technological readiness, culture, and market, every transformation strategy needs to be highly tailored. However, despite the crucial differences between financial institutions, the most important change that all banks need to focus on is a shift from a product-centric to a customer-centric approach and creating a robust technology infrastructure to support it. 

While digital transformation puts technology at the center, human interactions will always remain paramount in the banking industry. Especially when it comes to making life-changing financial decisions like applying for a mortgage, it’s unlikely that technology will substitute for in-person or virtual consultations with financial advisors. 

At the same time, digital personalization will play the most important role in helping banks build emotional connections with customers. Banks should now aim to become an indispensable part of consumers’ financial health, which means going beyond traditional banking offerings and providing solutions that address customers’ needs and wants.