Financial Services Face 5 Key Challenges In Digital Transformation
Financial institutions that fail to innovate their technology infrastructure, as well as the way they use and access data, will watch competitors pass them by. This is largely due to the fact that consumer expectations for easier, more personalized service have never been higher. What’s more, with blockchain and artificial intelligence poised to make massive changes across all industries, banks are finally realizing the power of clean, aggregated data.
The first two orders of business for banks looking to make sweeping changes, according to Deloitte’s 2019 Banking and Capital Markets Outlook, are updates to their digital capabilities and modernization of legacy systems. These two categories alone make up 51% of banks’ focus in the coming year.
Of those planning to adopt new technologies in the next 12 months, 26% are planning to use data lakes and big data platforms, while 63% have either fully deployed such technology or are in trials with new technology.
Digitalization has the potential to transform the bank’s business model, cut costs, and reduce time to market. But before they can realize the success of digital transformation, banks must address the core pain points that have paralyzed the industry for so long. This means confronting:
- Complex legacy IT
- Inadequate data architecture
- Talent gaps
- Organizational resistance
- Technology built internally
Let’s take a look at how.
5 Challenges—and Solutions—of Digital Transformation
In order to undertake digital transformation, banks must first realize the underlying problems holding them back. Here are the five most pressing, along with solutions that will accelerate digital transformations in banking.
1. Complex Legacy IT
Many financial institutions still rely on complex legacy IT systems cobbled together over decades. These outdated systems and legacy code make it hard for existing software to talk to new digital applications, slowing the integration of new technologies. The ripple effect of this challenge is that digital transformation timeframes often go out the window, and budget increases are often required to reach completion. Not to mention the fact that sometimes technologies simply can’t (or won’t) work in conjunction with one another.
What’s the solution?
First, you need to account for the presence of legacy systems in your budget and scope of work. 80% of technology effort gets spent on integration. That leaves little time and budget for the rest of your digital transformation project, so plan accordingly.
Bake in extra time to complete the integration and allow for budget flexibility to handle additional costs.
Second, consider adopting the Agile methodology, which will streamline the transformation. Agile breaks down traditional silos and reduces duplication, red tape, and bureaucracy—all of which impede quick decision-making. As technology continues to advance and disruptors find more opportunities to enter the market, becoming agile will help you pivot and scale quickly.
Finally, consider creating an API architecture that enables legacy applications to communicate with digital applications. This approach is helpful during the transformation process, as it can support your organization from abandoning your entire legacy system.
2. Inadequate Data Architecture
Digital transformation is powered by clean, integrated, and accessible data. An inefficient data architecture significantly undermines the speed and progress of your digital rollout, hampers the types of technologies you can use, and limits their effectiveness. In short, organizations with poor data architectures and product silos compromise bigger transformation goals.
What’s the solution?
Analyze your data architecture to understand its strengths and weaknesses. A strong data architecture creates value by supporting data quality, as well as increasing standardization and cross-asset capabilities. It also enables advanced analytics and a range of applications that can boost efficiency and employee effectiveness. You’ll build a stronger foundation for your digital transformation by identifying the areas where data lives inside your organization and aggregating it in a scalable data ecosystem.
3. Key Talent Gaps
The lack of technical expertise inside financial services organizations is a significant threat to successful digital transformation. Because the finance industry is often perceived as lacking vision, it can be difficult for banks to attract and retain tech-savvy employees.
Less formal environments and demand for innovation (like startup cultures) make it easy for top talent to overlook the financial services world for more compelling career paths.
What’s the solution?
Banks can (and should) take a page out of the startup culture playbook. Because they start small, startups often promote growth and advancement within the organization. Find ways to provide current employees with opportunities to expand their skills and move into new roles.
To bring in people with digital expertise, you need to position your organization to naturally attract such employees. Quickly catch their attention by talking about your digital vision in your job descriptions. Potential employees will be on the lookout for companies that appear to be forward-thinking with plenty of potential to further their careers.
4. Organizational Resistance
When the standard way of doing things is upended, it’s bound to cause turmoil. Some employees may be concerned about the potential impact of digital transformation on the way they currently do their jobs. Even if digital transformation promises benefits that will make them more effective and productive, it can still be a hard sell.
What’s the solution?
If you want to overcome resistance, you need to get buy-in from key stakeholders across the organization. Present a business case detailing how technology adoption will position your organization for lasting success:
- Proactively address potential sticking points
- Highlight specific benefits and ROI
- Facilitate communication and engagement across stakeholder groups
You also need to put a clear strategy in place so employees understand the opportunity for growth. Nothing is more frustrating than a new solution no one understands how to use. Set employees up for success by providing training suited to the nuances of your teams and individual employees and build strength from within.
5. Choosing to Build Internally
On the surface, building your own technology from scratch seems like a good idea since it will translate to initial cost savings. However, organizations that keep their digital transformation initiatives internal face far greater challenges in the long run than those who get outside help.
Deployment takes longer, budgets are more greatly impacted by delays, maintenance, and testing, and scalability and further innovation can be stunted.
What’s the solution?
It’s important to address timelines, budgets, maintenance and testing costs, and scalability goals in advance. Having a clear picture of your desired outcomes for each element of your transformation initiative will help you allocate resources and make contingency plans.
Financial technologies—often referred to as fintech—can help you fill any gaps in your strategy. New fintech applications for financial service companies range from software to business models and are focused on creating or making a single product or service better. They’re also dedicated to significant time and money investments in continued development, meaning you’ll be able to leverage their evolution and innovation for years to come.
The need for financial service organizations to digitalize is undeniable. However, with the speed of change in the industry, it’s easy for organizations to jump the gun. Time is of the essence, yes, but banks must first put in the work to address the issues they currently face.
Only then should you look to strategies like creating data lakes from aggregated and cleaned data or updating underlying tech infrastructure to become more scalable, more flexible, and, ultimately, more successful.