Digital transformation in financial services refers to the integration of technology and financial services by such institutions as banks. This process has a lot of benefits, through automation, like safer and faster transactions, 24×7 assistance, and hassle-free banking. This change is being adopted across financial institutions, to enhance customer satisfaction.
This blog will tell you about digital transformation in financial services and how you can gain from it.
I. What is Digital Transformation in Financial Services?
Digital transformation in financial services refers to the incorporation of digital solutions to modernize companies providing financial services. This process helps in making the firms more efficient, productive, and streamlined. The use of modern techniques like automation enhanced customer interaction and transparency are popularly being adopted. This domain has been widely impacted by the pandemic, about which we will elaborate in the next section.
II. Impact of COVID-19
COVID-19 has had a huge impact on digital transformation in financial services. The pandemic initiated the use of digital transactions at a larger scale when most services were locked down. As per World Bank, 76% of adults globally opened a bank account in 2021. The use of digital payments also grew manifold with more than two-thirds of adults across the world making or receiving payments online. As David Malpass, World Bank Group President has reiterated, “The digital revolution has catalyzed increases in the access and use of financial services across the world, transforming ways in which people make and receive payments, borrow, and save.”
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Importance of Digital Transformation in Financial Services
Digital transformation in financial services is quite important for the future of any company involved in this industry. In the next few paragraphs, we will explain the importance of digital solutions in the industry:
a. Better customer experience: As per a survey conducted by EY, over 30,000 retail bank customers across the world considered customer experience (CX) to be the factor guiding their retention. Digital transformation in financial services enhances CX by catering to their needs 24×7.
b. Smoother operations and cost-efficient: With digital transformation in financial services, the industry can streamline processes using technology like automation. About 44% of upper-middle market companies expected an increase in their profitability by 1 to 9% in the next three years, as per BDO.
c. Lesser mistakes: Digital solutions lack any form of human intervention, therefore they are free of errors. Most data is automated and precise, with very less chances of mistakes.
d. More security: With digitalization, transactions can be done online with the possibility of hacking, malware and other problems being reduced. Through one-time passwords and layers of protection, online transactions become safer. As per Hitachi Systems Security Inc., only 1 in 3 cyberattacks can be successful when companies are digitalized.
e. Modern analytics: Data collection becomes easier when things go digital, thereby making decisions more analytical. Through AI, IoT and machine learning, data can be optimized and used accordingly to predict the future course of your company.
f. Room for performance and innovation: Digital solutions also allow employees to innovate through experimentation. This brings about radical change and improves the general working of the business. With this change, employees can also perform better, with state-of-the-art technology at their disposal.
Now that we have an idea about the importance of adopting digital solutions in the finance industry, it is important to suit the deployment to certain trends. Here is a list of the key trends that are guiding the digital transformation in financial services:
I. AI and machine learning
A lot of companies in financial services are increasingly adopting AI and machine learning (ML) for improved customer experience. Through AI online fraud and money laundering are decreasing and decisions are becoming smarter and quicker. Easier data collection, automation and chatbots for 24×7 assistance have also helped enhance customer experience.
Bank of America, for example, has a virtual assistant named Erica which has over 6 million users and over 35 million requests. This speaks volumes about the efficiency of AI in digital transformation in financial services.
II. Internet of Things
Companies are constantly adopting IoT to analyze customer behavior and develop customized products for them. Many are also involving usage-based insurance in their daily work to enhance customer satisfaction. With the help of modern devices like sensors, it also becomes possible to track the performance of employees and significantly reduce the costs of management.
As per Verified Market Research, the market size of IoT in banking and financial services was about 800.135 million USD in 2021. This figure is expected to reach over 30,925 million USD by 2030.
With the help of blockchain technology, many companies are succeeding in digital transformation in financial services. It is known to make supply chains stronger and develop more efficient trading systems. Moreover, global transactions become faster with blockchain and can happen 24×7.
IV. Cybersecurity and privacy
One of the essential needs of companies involved in financial services is their data, which must be protected in all circumstances. Digital solutions are known to prevent cyber-attacks with layers of security. As per the IBM Security Cost of a Data Breach Report, the average cost per breach within companies providing financial services was $5.86 million in 2019.
Moreover, about 75% of cases include hacking, 18% accidental disclosure, 6% insider threats, and 2% physical breaches. This is why you must invest in cybersecurity. Digital transformation in financial services can detect and quickly respond to the challenges being faced and deal with them efficiently.
V. Comprehensive data
Through comprehensive data, companies involved in financial services can better analyze themselves and provide a personalized experience to their clients. It also helps them stay ahead of the competition, publicize their services, and use data efficiently. Using algorithms provided by machine learning, digital transformation in financial services is also becoming automated.
As per McKinsey, the adoption of comprehensive, open-data ecosystems can boost the economy of the European Union, the US, and the UK by 1 to 1.5% of their GDPs by 2030. This figure could be as much as 5% for countries like India.
VI. Cloud solutions
With a lot of data being processed every day, companies are moving towards cloud-based solutions to store all their data. As per experts, the new mobile banking registrations have increased by 200% thereby, making cloud and mobile solutions important. Cloud-based solutions are also giving companies a chance to re-innovate as they can save about 15% on IT spending whereas, small to medium-sized businesses can save up to 36%.
VII. Robotic process automation
As per Gartner, RPA has already been implemented by about 80% of global companies offering financial services. With complete automation of process, predicting the future course of action can become easier and analysis of data can be improved. When everything is automated and correct to the best knowledge, companies can become more efficient, compliant and productive.
5 Steps to Plan
It is crucial to plan your digital transformation in financial services to ensure better results. Each plan must include certain steps, about which we will be talking next.
I. Characterize digital finance transformation
It is important to define what a digital financial transformation is, for you to understand how you must go about the entire process. Digital transformation in financial services refers to adopting digital technology and financial tools to grow your business. This process will include an improvement in fiscal reporting, releasing new models of pricing and streamlining fiscal processes.
II. Develop leadership roles
You must develop leadership roles by delegating responsibility to those who are capable of handling it. With digital transformation in financial services, a lot of your operations will become automated and you will be in a better position to make decisions. It is advised that you select heads based on expertise and not seniority. In this manner, you will be able to focus on stuff like data analysis, predicting, planning et cetera.
III. Find possible hindrances
When you are strategizing on how to begin your digital transformation in financial services, it is important to analyze the possible obstacles that you might face. Conduct thorough research to identify the pain points of your company and then, plan ahead to solve them. You may also consult department heads, who will be able to give you better insights into your company and help you cater to the needs.
IV. Determine chances for automation
You must utilize the chance for automation, wherever you can find it. To be sure, digital transformation in financial services offers a wide variety of opportunities to automate processes. A lot of companies use automation in areas like customer onboarding, transactions, data management et cetera. With the help of digital solutions, you will be able to predict the future course of action for your company easily.
V. Have a proper mindset
You must understand the real purpose of digital transformation in financial services. The aim is to become more productive, efficient and active in nature, to cater to the needs of the customers. Do not consider it to be just an upgrade but a requirement for your company’s better future.
Digital Transformation in Financial Services: Challenges
No transformation is free of challenges, and the same is true of digital transformation in financial services. In the next few paragraphs, we will talk about the challenges involved in this domain.
- Legacy systems: You must be prepared for higher investments and digital expertise when you are about to shift from your legacy system to the newer and updated one.
- Security: Traditional banks are at a higher risk of hacking, data theft and loss because of the voluminous data that these firms store. You must consider this challenge.
- Customer experience: It must be understood that digital solutions are better equipped to cater to the needs of their clients, whereas traditional banks require a lot of research, which is time-consuming.
- Work culture and reskilling: Transformation involves certain amends to the work culture and requires training employees again. This can be time-consuming and many employees may show reluctance.
- Competition: One must adopt digital solutions, considering the competition from several platforms like Google and Amazon. It is important to prioritize customers to get an edge over your competitors.
In this section, we will be elaborating on the examples of digital transformation in financial services which will help you understand the concept better.
I. Rise of challenger banks
Challenger banks are banks that only provide their services digitally, thereby increasing customer satisfaction. Such banks are user-friendly because of digitalization and offer lucrative interest rates to customers. These banks have started emerging as a result of digital transformation in financial services. With more people moving towards online transactions, these have become a reality and are gaining popularity.
II. Adopting fintech solutions
Fintech solutions are increasingly being adopted as they provide services like 24×7 chatbots, budgeting and tracking expenditure. A large number of financial companies are moving towards fintech solutions, which are considered to be the driving force behind digital transformation in financial services. This is leading to an easier and more efficient way of doing transactions.
III. Digital investments firms
Digital transformation in financial services has made platforms based on algorithms popular. Investors are increasingly moving towards this new trend, which is more affordable and faster. Moreover, online advice platforms are also using machine learning-based algorithms to customize the experiences of customers and cater to individual needs more efficiently.
Blockchain technology is becoming more popular, as it has the ability to make supply chains stronger and develop more efficient trading systems globally. Moreover, global transactions become faster with blockchain and can happen 24×7, without any pain points.
V. Online banking
Online banking is also called internet banking, which has facilitated online transactions manifold. Customers can easily link their bank accounts with the mobile applications provided by their bank and then send and receive money from anywhere in the world. This method is much faster, safer, and hassle-free.
VI. Automated investment services (robo-advisors)
Robo-advisors are known to provide financial assistance and advice through automation and analysis of all your data. This method involves practically no human intervention and is more precise. They charge a very low management fee and offer a wide variety of services like tax optimization, and where investment would be more profitable.
VII. Digital identity and authentication solutions
The use of digital identity and authentication is making financial transactions more secure. A lot of companies are adopting this in their digital transformation in financial services, as a key element of digital trust. This makes hacking less possible and provides access to computer services. Through this method, computers can mediate relationships without any human intervention.
VIII. Digital currencies
A digital currency is a virtual currency that is managed and exchanged digitally over the internet. Popular digital currencies are Bitcoin, Ethereum, Polkadot et cetera. They are being adopted because they provide faster transactions, are cost-efficient due to no physical manufacturing, and cheaper costs of transactions.
In this section, we will elaborate on the impact of digital transformation in financial services through a brief case study of digital transformation at Bank of America.
Bank of America Corporation is a global investment bank, founded in 1998. The financial institution began by focusing on the involvement of IT and RPA to serve its customers well and protect the bank. It deployed its first robot in the fourth quarter of 2016 to cater to problems like bankruptcy and data loss.
This idea has given a rise to cost savings of about 100,000 USD for each code request and around 350,000 USD for each code change. Moreover, the operational efficiency of the bank has also become more stable and faster through automation. Bank of America has deployed about 22 robots in its offices for a smoother customer experience, and the institution’s annual revenue stood at $115,053 million in 2022.
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In this blog we have discussed about digital transformation in financial services, and why it is widely being adopted by a large number of companies that are involved in this industry. We have also elaborated on the key trends guiding this shift and how one can take best advantage of it.
What is digital transformation in financial services, and why is it important?
Digital transformation in financial services refers to the adoption of digital technologies to improve the efficiency, effectiveness, and agility of financial services providers. It involves using technologies such as artificial intelligence, blockchain, and the internet of things to streamline operations, enhance customer experiences, and drive innovation. Digital transformation is important because it enables financial services providers to stay competitive in a rapidly changing industry and meet the evolving needs of their customers.
How can digital transformation benefit financial services providers?
Digital transformation can benefit financial services providers in many ways. For example, it can help them improve their operational efficiency by automating processes and reducing manual tasks. It can also help them enhance the customer experience by providing personalized, convenient, and accessible services. Additionally, digital transformation can enable financial services providers to launch new products and services more quickly and at a lower cost.