Common pitfalls of banking modernization and how to avoid them

Digital experiences are so commonplace  they’re taken for granted. Your bank, on the other hand, is just starting to catch up.  If you're reading this, you’re probably in the midst of a banking modernization process. There are plenty of good reasons to modernize: meet customer expectations, keep up with the competition, and comply with regulations, to name a few. But if not done correctly, modernization can lead to some very costly failures.

Meet the evolving customer demands

Customers can order nearly anything to be delivered with just a few clicks and are taken aback when they encounter manual banking processes. They struggle to understand why traditional banks make their lives difficult with delays and clunky paperwork.

In a world where consumers can track a pet while vacationing on the other side of the world, it’s hard for customers to understand why it’s so complicated to receive an instant payment from a bank across the street. 

Face the growing competition from Fintechs

Customers' digital expectations are only one of the drivers pushing banks toward modernization. FinTechs have exploded in recent years, with Forrester finding that challenger banks hold eight times as many personal accounts today than they did in 2018. The new players in the field offer fully digital banking services, including savings accounts, low-fee international transfers, payment tools, and loans. 

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[.figure]x8[.figure]

[.emph]Number of personal accounts at challenger banks compared to 2018[.emph]

Digital competitors are eating into the traditional banks’ market, driving home the point that digital transformation isn't a technology issue. It's a strategic business decision, and failure to adapt as soon as possible could evolve into a technological quagmire that will be difficult to recover from. 

Adapt to regulatory pressures

Another driver for banking modernization is the increasing number of regulations governing financial institutions.  Reporting regulations now require digital modernization. Regulators believe that enhanced system integration will enable the integrity of bank reporting. 

Consumers, competitors, and regulators are all pushing banks to upgrade their legacy systems and integrate with solutions that will allow banks to continue using their legacy systems but do so effectively and provide better customer experience. Modernization isn’t about trying out new fancy technology just for the sake of it; it's about survival. 

Stages of Banking Modernization

Of course, digital transformation doesn’t happen overnight. Legacy systems aren’t easy to bring into the modern digital world. They need to be supplemented with technologies that bring the best customer and employee experience forward while keeping banks’ core systems running smoothly.

Harvard Business Review identifies four pillars of a digital transformation. 

Digital Transformation Stage 1: Upgrading core systems

In the first stage, the core systems are modernized. Applications and legacy systems are upgraded. This upgrade, which includes mobile infrastructure, databases, and cloud applications, provides the bank with the tools it needs to increase efficiency and tightly integrate different systems for enhanced reporting capabilities. It sets the stage for future digital transformation, particularly when it comes to the customer experience.

The benefits to the bank are numerous. In addition to placating regulators, it reduces maintenance and IT costs, especially if critical infrastructure is moved to the cloud.

The benefits extend to employee satisfaction–employees often find their jobs easier when using modern software designed with the user in mind.

Digital Transformation Stage 2: Integrating with ecosystems

Once the core systems have been updated, it's time to focus on system integrations and APIs. Through system integrations, banks can offer their customers a seamless experience as they move between channels and products.

Systems integrations also give rise to new products and services that would otherwise be impossible. For example, a bank might not have been able to develop an AI-based fraud prevention system if it had to start from scratch. But by integrating with a third-party solution, the bank can offer that service to its customers.

This stage of digital transformation requires the development of ecosystems that allow different applications to communicate with one another.

Digital Transformation Stage 3: New business models

Third, banks need to update their business models. This includes revisiting the way products and services are priced and delivered, as well as how the bank makes money. For example, banks may need to start offering free accounts to attract new customers. 

Using new technologies, banks can develop new offerings and use internal data to improve their marketing and product. Or they may need to focus on creating more personalized experiences that can’t be replicated by digital competitors. They can also move into new markets or deepen their relationships with customers.

This stage of digital transformation is all about taking advantage of the opportunities that modernization presents. The goal is to use technology to improve the customer experience and increase revenue.

Digital Transformation Stage 4: Focus on customer experience

The final layer of digital transformation is the customer experience,making it easier for customers to open and manage accounts. Banks can leverage the advances made in previous stages to provide a better customer experience by upgrading their online and mobile channels, more self-service options, and using advanced technologies like AI to improve fraud prevention.

Digital transformation is a journey, not a destination.

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As banks move through these four stages, they will continue to upgrade their technologies, systems integrations, and business models. The goal is to become a more efficient and customer focused institution that can compete in the digital age.

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Common Pitfalls of Modernization

Nearly 80% of digital transformation initiatives fail. There are many factors that contribute to the success or failure of a digital transformation project in the banking industry. In order to avoid common pitfalls, it is important to be aware of these factors and take them into account during the modernization process. Some of the most common pitfalls include:

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[.figure]80%[.figure]

[.emph] of digital transformation initiatives fail[.emph]

1. Lack of transparency in digital transformation processes

Digital transformations require input and participation from employees throughout your organization. When organizations embark on such projects without prioritizing communication and transparency, it can be difficult to get buy-in from stakeholders who don't fully grasp why they are being involved, what is expected of them, and how the organization will benefit from the initiative. 

This creates tension among employees and reduces the synergy needed to move the process along quickly. As a result, these projects often fail. It’s important to have an open communication policy, so employees understand what is happening and why. This will help reduce the risk of employee turnover during times of change.

2. Misunderstanding of the goals of modernization

​​Digital transformation is a complex process that touches every part of the organization. It’s important to have a clear leader who can guide the team through the change and ensure everyone is rowing in the same direction. 

When the goals of the project are not clearly defined and communicated, it is easy to get pulled in multiple directions at once. Digital transformation means many things to different people, and it is important to define the priorities and goals for your organization. 

This leader also needs to be able to make tough decisions,prioritize goals, and set KPIs forthe transformation. 

3. Implementation challenges and unintended consequences

Any time there is a large-scale change, there are bound to be bumps in the road. Implementing new systems and technologies can be difficult, and it’s often hard to anticipate all the potential problems. There can be unintended consequences of changes, such as employees who don’t have the necessary skills to work with the new systems.

It is important to have a plan for dealing with these challenges and for mitigating the risks associated with change. This includes having a backup plan in case things go wrong and adequate training for employees so they are able to use the new systems successfully.

4. Resistance to change by employees and customers

One of the biggest challenges for organizations undergoing digital transformation is resistance to change from both employees and customers. Employees may be hesitant to change the way they work, and customers may be reluctant to switch to new systems.

It is important to think of onboarding and training as continuous processes, as well as to focus on customer and employee experience to make the transition as smooth as possible.

5. Lack of communication and collaboration

Lack of communication is often the downfall of digital transformation projects.  This can be due to a lack of clarity about the goals of the transformation, or a lack of communication channels.

It is important to have regular meetings to ensure that everyone is on the same page and that there are no misunderstandings. This will help avoid any costly delays or problems down the road.

6. Not including regulators in ensuring a successful modernization process

When it comes to digital transformation, banks and regulators need to work as partners.  

Developing an online KYC process, requires the bank to meet regulatory approval to avoid potential fines down the road. 

Failure to work with regulators can result in costly delays and even fines. It is therefore important to have a clear plan and to communicate with regulators throughout the process.

Working with regulators from the get go to understand compliance requirements helps ensure that the process moves forward smoothly. 

7. Misunderstanding the role of  technology 

Technology is an enabler of innovation; it is not an end in itself. While the digital transformation will give your organization  sophisticated tools, it’s more important to align the upgrades with business goals. 

8. Process redesign failures 

Digital transformation projects often involve a redesign of business processes. However, if these processes are not properly thought out, they can actually slow down the transformation process and cause problems.

It is important to have a clear plan for how the new processes will work and to test them thoroughly before rolling them out.

9. IT system integration problems

Technologies may be flashy and new, but they need to be integrated into the overall system in a way that makes sense for the bank.

Integration of new applications into a system is one of the determining factors in a project’s success. These integrations can be complex, as legacy systems are notoriously difficult to integrate with. Ensure that the solutions you chose can smoothly integrate with your internal systems and function as designed. 

10. Poor governance and change management control

A lack of governance framework can lead to confusion and conflict among stakeholders, and can ultimately derail the transformation project.It is important to have a clear set of rules and procedures for how the project will be run and who will be responsible for what.

Make sure you have detailed documentation of all the changes that are made, as well as who made them and why. This will help avoid any confusion or conflict later on.

How to Avoid the Pitfalls of Banking Modernization

Digital transformation is a complex endeavor that often fails.  But you can avoid these pitfalls if you make sure to map out potential points of failure in advance.

To make sure that your digital transformation efforts are successful, pay attention to the following aspects:

Understand the different stages of modernization. 

As mentioned earlier, digital transformation takes place in stages. Prioritize the  initiatives d based on your bank’s digital maturity level. It’s important to take your time while gathering specifications and fully understanding your  needs. This will lead to more effective design and implementation. 

Ask yourself: what stage of the digital transformation journey am I at? 

Consider all aspects of modernization

Consider all aspects of a digital transformation project before making a decision, including customer needs. As you know, customer experience is of paramount importance, so make sure to prioritize it when drafting your digital transformation roadmap.

Don't be afraid to ask for help

Banks are complex organizations and it's often difficult to make changes on your own. Take advantage of your internal resources - your employees know your business and your customers best. Set up consulting sessions with different departments to ensure you get all voices heard before you jump into action.

Make sure you have a plan in place for when things go wrong (because they will)

Digital transformation is not a straight line from point A to point B. Hiccups and problems are inevitable when embarking on such a huge project. Try to map potential points of failure in advance and draft a contingency plan.

Be prepared to adjust as the banking landscape changes

Banks operate in a dynamic environment, with new regulations and services popping up all the time. constantly being introduced. Having a plan in place to adjust to new changes will help guide your digital transformation of the project and move it forward. 

Utilize technologies that empower your employees

One way to increase employee buy-in, promote digital culture, and improve the customer is to use technologies that empower your employees to take digital transformation into their own hands. 

No-code software technologies empower employees to quickly ramp up software and transform manual processes. No-code platforms can introduce small digital wins that are highly efficient and can be launched while your digital transformation is underway. 

Banks operate in a dynamic environment, with new regulations and services popping up all the time. Having a plan in place to adjust to new changes will help guide your digital transformation project and move forward.