It is now clear to traditional banks worldwide that digital transformation is not just a passing trend, a good to have, or a simple upgrade—it is an essential necessity. It is a strategic shift to technology-powered operations and business models that are key to long-term competitive advantage, revenue growth, and profitability amidst significant market disruption. In fact, the transformation goes much beyond mere customer facing solutions to modernizing back-end operations, enabling agility, scalability, and compliance. Banks have been on this transformative journey for a while now. And as 2024 ends, let’s understand some of the challenges banks face, as well as some of the emerging trends that will shape banking digitization over the next year.
Digital Transformation Challenges
Only 30 percent of banks are able to successfully implement their digital strategy after going through the transformation journey.1
Most are not able to achieve their objectives. 70 percent of transformation efforts overshoot their budgets and 7 percent cost more than double of their original projection. Most often, leaders fail to understand the full extent of the complexities involved in a digital transformation effort. It involves complicated interfaces and vast reserves of data to be managed across a highly interconnected and interdependent organizational landscape. Organizations do not involve all stakeholders in the transformation strategy and implementation and often misjudge process changes and even the scale of transformation required. Further, they fail to adequately address technical debt that builds up over time as banks add solutions and platforms ad hoc to meet specific needs. The transformation budget must take into the account the cost of removing unused applications and rationalizing the technology landscape.
Banks need to begin with a comprehensive digital transformation strategy that considers their technical debt, available human resources, and the key stakeholders involved in the transformation effort. It is crucial to ensure that all stakeholders are aligned with the objectives, approach, end goal, and implementation plan. And it is also crucial to put in place robust mechanisms to quantify and track the impact of the transformation effort. A clear link between digitizing specific processes and revenues from those processes will help leaders understand the value and effectiveness of the initiative. It will also give them the opportunity to course correct if required. Despite all this, banks often lack the skilled talent they need to implement their strategies. And specialized talent often come at high costs, adding to budget constraints.
Key Digital Transformation Trends
The good news is that despite these challenges, most banks are focusing on accelerating their digital transformation journeys. 64 percent of banks have already migrated or are in the middle of migrating large portion of their workloads to the cloud.2
61 percent are in the process of modernizing core systems and 61 percent are also starting to leverage AI. And 67 percent of banks intend to carry on with their transformation journeys even amidst economic slowdowns. Here are some clear trends emerging:
- Core Augmentation: Banks invested heavily in their core systems, which continue to power operations today. Unfortunately, they lack the agility and scalability required to drive modern, customer-centric, seamless, and personalized strategies. Replacing the legacy core is expensive, time consuming, and highly risky and most banks do not want to go down that road. Instead, increasing number of banks are now opting for core augmentation – adding modern, specialized solutions over the legacy core as complementary middleware to drive agility, scalability, and innovation.
- Modular, Composable Infrastructure: Traditionally, core banking systems were monolithic in nature and contained all the functionalities the bank needed. This made it extremely difficult to make changes in some capability without impacting the entire system. Banks today are moving to composable, modular system augmentations. In this, the core system continues to house critical functions like transactions and account management. But other capabilities like product management or catalogs are moved out to specialized, augmented solutions. This allows the bank to quickly respond to market or customer demands with localized changes.
- Leveraging New Technology: Artificial Intelligence and Generative AI are redefining how businesses operate. For the banking sector, these technologies hold tremendous potential as they try to transform to customer-centric business models. AI can deliver up to USD 1 trillion in incremental value every year.3
Banks are leveraging AI to analyze vast volumes of data to understand customer engagement and behavior, which then form the basis of personalized, relationship- based strategies. They are using AI to improve risk detection and management, and cybersecurity. They are also using it for fraud detection and prevention strategies. Generative AI and chatbots are already being leveraged to improve customer experiences with personalized interactions. This use of AI will deepen further as banks transition into AI-first organizations.
- API Economy: The key driving forces behind banks’ push for digitization is increasing competition and customer demand for personalized, intuitive, and seamless financial services. This has led to the emergence of API-based banking models. These models allow banks to partner with fintechs, and even non-banking partners to embed financial services into a wide range of offerings, ensuring a frictionless and personalized experience for customers. With regulators focusing on open banking, new API-based business models like Banking-as-a-Service, banking platforms, and ecosystems are transforming how financial services and products are accessed and consumed. Banks are keen to explore these new opportunities with a robust digital foundation.
- Robust Third-Party Middleware Solutions and Partners: Building an in-house team of technology experts for implementing digital transformation strategies can be expensive and time consuming for most banks. As a result, they are increasingly turning to reliable, experienced, and specialized vendors who can deploy a robust, cloud-native, and microservices-based middleware platform over their legacy cores to drive innovation. As more banks turn to core augmentation and composable architectures, this trend is likely to intensify.
Digital transformation in the banking sector is not without some challenges. But it remains a top priority for organizations looking for long-term competitive advantage and revenue growth. Banks now need to focus on creating the right strategy for their organization coupled with a comprehensive implementation plan. This will help them accelerate their path to technology-powered innovation and profitability.
