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Digital Transformation in Banking: An Essential but Hazardous Journey

Every industry is digitalizing, with banking more advanced than most. The goals are improved efficiency, better customer service, and higher revenues, but new technology is not without its risks.

The digital transformation of businesses and other organizations started with the use of computers back in the 1960s, but it only really began to take off with the widespread adoption of the internet in the 1990s. Even then, the term itself was not coined until 2011 when a Capgemini Consulting and Massachusetts Institute of Technology (MIT) report defined it as “the use of technology to radically improve the performance or the reach of businesses.” At least, Techopedia says they were the first.

OpenAI’s ChatGPT begs to differ. When asked, it says the origin of the term “is difficult to trace to a single person or organization.” It agrees that Capgemini and MIT helped popularise the term back then, but it was also used in a 1999 book titled Digital Transformation: The Essentials of e-Business Leadership by Keyur Patel and was used by others before that.

Anyway, what is important is the meaning of the term today which, in the simplest sense, is the use of digital technology by an organization to digitize analog information; for example, storing patients’ health records in a computer instead of on paper, or providing customers’ bank statements online instead of posting paper ones. 

I have been quite lucky to lead several large digital transformation engagements. I believe digitizing is only half the story because digitalizing is the other half – moving beyond the information and converting entire business processes over to digital technologies, such as video conferencing to replace physical meetings, self-service check-outs instead of a human cashier, and online shopping instead of high street shopping. 

The goal of both digitization and digitalization is to improve operational effectiveness, cost efficiency, user experience, and, in the case of companies, sales, and profits. Although industries have been digitally transforming for decades there is no end in sight, because technologies are constantly evolving and there is so much they can be applied to.

To help executives keep up to speed, Harvard Business School offers several programs leading to a Digital Transformation Certificate for those who complete three programs in three years. An additional one-week program has just been launched,  called “Leading in the digital era,” which takes place on campus in April.

As the course notes explain, “though many of today's business leaders are neither technology experts nor digital natives, technology is critical to their ability to keep a business competitive and drive growth.” They go on to say that “no matter what industry you are in, you need to grasp what it takes to transform your organization to reap the full benefits of digital tools and data.”

Each course costs around $13,000, so taking three to get the certificate will cost participants – or more likely their employers – just south of $40,000. Yet if it helps them “master the leadership mindset, capabilities, and practices required to build more agile and innovative organizations,” as Harvard says, then it is probably worth it. Saying that, I do not have this qualification. I do have real-world experience (many late nights) which is invaluable when leading change. 

Digital transformation in banking

Banking is one of the more technologically advanced industries. Banks are partnering with financial technology providers to assist them on their transformational journeys as they replace legacy IT systems with cloud-based alternatives, introduce mobile apps, deploy chatbots, automate processes, use artificial intelligence, experiment with blockchain/distributed ledger technology (DLT), and much more.

Research company Gartner has created a “Hype Cycle for Digital Banking Transformation” which places around 40 technologies in a diagram to help banks understand the opportunities and risks of each so they can “avoid adopting something too early, giving up too soon, adopting too late, or hanging on too long.”

It ranks the technologies according to how innovative they are, their expected potential, how much they may have failed to live up to expectations, when initial benefits begin to emerge, and when they prove successful and go mainstream.

The latest Hype Cycle pinpoints four technologies that have the greatest potential for high levels of transformation in the next couple of years. Banking-as-a-Service (Baas) sits at the top, closely followed by chatbots, public cloud for banking, and social messaging payment apps (instant messaging platforms that can originate payments).

BaaS is where a bank digitally integrates its services with a non-banking business so that the non-bank can provide financial products to its customers. The benefit for the bank is that it creates an entirely new customer base and revenue stream. The integration is done with application programming interfaces, (APIs) and the service is delivered over the cloud, like Software-as-a-Service (Saas) and other cloud delivery models. Gartner predicts that 30% of banks with greater than $1bn in assets will launch BaaS by the end of 2024, although half will fail to meet their targeted revenues.

The fact that technological innovation does not always end in success and is fraught with risk is highlighted in Finextra Research’s report The future of digital banking in the UK 2022. The more reliant banks are on a digital ecosystem, says the report, the greater the likelihood of cyber attacks, online fraud, and operational failings by third-party providers of cloud computing and other outsourced services. There is also the possibility that new technologies do not perform as they should, and that legacy IT systems prove difficult to decommission. Then there is the problem of attracting and retaining top digital talent when the best people are in high demand and command high salaries.

Case studies

HSBC, one of the world’s largest banks, in October announced a strategic collaboration with U.S. technology company Oracle “to accelerate the bank’s digital transformation.” Under the multi-year agreement, the UK-headquartered bank will upgrade and migrate some of its database systems to Oracle Exadata Cloud@Customer, a cloud platform delivered as a managed infrastructure service in HSBC’s data centers.

The deal will help HSBC speed up the development and delivery of new services, make them more secure and build digital capabilities and skills across its workforce. “Our strategy is to digitize the bank at scale so that we can innovate faster for customers, and our collaboration with Oracle is important in advancing this transformation agenda,” says Frank McGrath, the bank’s Chief Technology Officer.

JP Morgan Chase, the world’s biggest bank by market capitalization, believes technological advances across industries and throughout society “make digital transformation imperative for organizations to adapt to shifting marketplace realities.” In a sponsored article in the December issue of MIT Technology Review, the U.S. bank’s Chief Information Officer Eisar Lipkovitz says “digital transformation is redefining how companies operate across all areas of a business.”

The cloud is key, he says. By transitioning architecture and operations to the cloud, the bank “aims to improve customer experience and products, adopt modern data practices, and discover operational efficiencies.”

First Abu Dhabi Bank (FAB), the United Arab Emirates’ largest bank and one of the biggest in the Middle East, teamed up with IBM last year “to support the bank’s ongoing digital transformation journey.” IBM is working on the bank’s digital platforms in a hybrid cloud environment to deliver a seamless digital experience to its customers. Srinivasan Sampath, FAB’s Acting Group Chief Technology Officer, says the bank needs to use “the latest innovations to underpin our ongoing digital transformation efforts.”  

Such efforts do not come cheaply. Although FAB announced last month that it made a group net profit equivalent to $3.7bn in 2022, 7% up on the previous year, it revealed that the profit would have been higher had it not been for operating costs of $1.8bn, 15% up – a rise partly driven by a “write-off of legacy systems in Q4 ’22 as part of our ongoing technology transformation strategy.”

Enter the regulators

Not surprisingly, financial regulators are taking a keen interest in banks’ digital strategies. Jessica Rusu, the FCA’s Chief Data, Information and Intelligence Officer, speaking at an Alan Turing Institute event last month on the adoption of artificial intelligence in the financial sector, said that “regulation should not deter innovation.” However, regulation was still needed to “protect consumers and promote the effective functioning of markets.”

She was optimistic about the use of AI in financial services as it has the potential to allow firms to offer better products, improve operational efficiency, increase revenue, and drive innovation. However, she warned that AI can also “pose novel challenges for firms and regulators,” including bias in data and a lack of explainability – not being able to explain how an AI model arrives at its decisions.

Consequently, a key question facing financial regulators is whether AI “can be managed through clarifications of the existing regulatory framework, or whether a new approach is needed,” said Ms. Rusu. One way the FCA has been dealing with this and other technology issues has been to run a series of Digital Sandboxes, where firms can test their new propositions and where the FCA can develop a regulatory framework to cover these propositions.

Pentti Hakkarainen, a member of European Central Bank’s (ECB’s) Supervisory Board, in a speech last year on the digital transformation of the European banking sector, said changing customer demands and pressures to reduce costs and increase efficiency are leaving banks with no option but to use modern technology. “Digital transformation is a must for banks,” he said.

He outlined some of the main developments and advantages for banks and their customers alike. But he warned that the changes also bring new challenges  – such as outsourcing risks and cyber attacks – and that supervisors have a role to play in mitigating those risks. As a result, Europe’s supervisors are “gathering information on the digitalization process of supervised banks to ensure that we have a horizontal picture of where banks stand” and, where necessary, make regulatory proposals, he said.

There is no denying that the digitalization journey is a hazardous one. There is the constant possibility of new services and products failing to perform, outsourcing let-downs, unexpected cyber vulnerabilities, and more. Customer loyalty and brand reputation are hard to build but when things go wrong, easy to lose. The pressures on Chief Information Officers (CIOs), Chief Technology Officers (CTOs), and other senior executives are compounded by regulators scrutinizing everything they do.

On the other hand, it is an essential journey. And if the right navigational skills are deployed it should be a rewarding one.


© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.


digitalisation, ankura, banking, digitisation, ankura forensic forum, global strategic advisory, article, cybersecurity & data privacy, financial services, global advisory, crisis and litigation communications

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