What is digital transformation in banking?

Introduction

Let’s be honest, we’ve all heard the phrase “digital transformation” ad nauseam as it takes the world by storm. In fact, according to IDC, worldwide spending on digital transformation is forecasted to reach almost $4 trillion in 2027, meaning this term isn’t going anywhere. But what does it actually mean, in the financial context?

At this point, digital transformation has become a banking buzzword that people like to trot out at every occasion, from boardroom meetings to chats around the lunch table. And like many buzzwords, the actual meaning of this term has been lost along the way or fragmented so completely that many bankers would struggle to define it.

Even if they did, they’d probably say it’s something like “a project wherein a single department within a bank works to overhaul the organization’s tech infrastructure” or something along those lines. However, while that statement captures part of the big picture, it also misses the finer details in three key ways, particularly in the way it conflates digital transformation with banking modernization. Let’s explore these three differences so we can better understand what digital transformation is — and isn’t.

1. Digital transformation isn’t a “project”

Sad to say, but digital transformation isn’t something that happens overnight. It’s not even something you can pull off in a few years. Maybe it’s not even something you can “accomplish” at all, because the industry is always changing, and your bank will need to do the same. While you can, for example, use a platform to modernize your systems in a relatively short period of time, digital transformation is a larger concept, so you need to have a long-term view. We’re talking five or more years, which is why calling it a “project” is a mistake, since this implies it’s something you can tackle, achieve, and then move on. That’s why it’s slightly worrying that 5% of financial institution executives say that they’ve completed, or are almost done, with their digital transformation strategy, according to Cornerstone. It’s very possible they’ve misunderstood the continuous, cyclical nature of the process.

To avoid this error, it’s important for us to see digital transformation for what it is: a total reinvention of your bank’s operating model, its structure, its culture, and, yes, its technology. But that also means constantly monitoring the needs of your customer and employees and responding in turn, among other factors. That’s an ongoing process, not something you can write off as a mere project. And digital transformation certainly isn’t just adding some new digital channels, which brings us to the next point.

2. Digital transformation is about more than tech

As we wrote in our blog series about Engagement Banking, it's simply not enough to add a few digital channels or a new app. That’s not digital transformation — it’s digitization, a channel-centric approach that will alienate your customers and employees while adding to your tech debt. By simply adding a layer of shiny new digital tech, you’re ignoring the root cause of your legacy burdens and also doing so in a way that prioritizes your bank’s needs, not your customers’ needs.

Of course, updating your tech is an integral part of any successful digital transformation. In fact, according to Fintech Futures, nearly 56% of respondents to a survey said legacy systems are one of their biggest barriers for digital transformation. But don’t neglect to consider a few other things that are involved here, a few of which we've covered above. A true digital transformation will involve reconsidering the way your bank approaches everything from the customer experience to your institutional culture, as well as things like operational efficiency, digital innovation, and banking ecosystems. Clearly this is a massive undertaking, one that you shouldn’t tackle alone, which brings us to our final point.

3. Digital transformation is a team sport

Unfortunately, in their attempt to eliminate silos, many banks end up creating new ones, particularly between departments, ensuring the process will continue on and on, costing millions — if not billions. Believe it or not, according to a recent survey, 75% of global senior and C-level execs said they saw different business functions competing against each other, instead of collaborating, during the digital transformation process. Of course, that poll wasn’t exclusive to the banking industry, but we're certain the trend extends to our industry, as well.

So here’s our advice: make sure your digital transformation team is cross-functional, incorporating not only business leaders but also tech leaders and other groups, as needed. Leaving either business or tech parties out is a recipe for disaster, since you can’t operate without both. Imagine what an entirely tech-centric banking solution would look like without considerations of return on investment or customer engagement. Now think about a business-centric one, where the tech falls short or lacks the proper support. Both would be costly and could never deliver the level of value your bank needs.

Let's not get ahead of ourselves, since we'll cover this topic later in this series, but the secret to digital transformation success is building a banking flywheel that contains both the tech and business sides of things. If you can create a flywheel that powers both at the same time, you’ll stand a great chance of future-proofing your bank for the years to come.

One final note — you also shouldn’t try to approach digital transformation without the support of a trusted strategic partner. Even with a sky-high budget, you could end up wasting millions before realizing you need help. So if you’re struggling to choose the ideal partner for your bank, check out our blog on the top 9 digital banking platform providers. That will give you a solid starting point and help you accelerate your digital transformation journey.

So, what is digital transformation?

To wrap things up, here's a more holistic, accurate definition of what digital transformation is. Instead of the previous, reductive definition, you should think of digital transformation as the integration of digital technologies into the areas of banking that can best benefit from them, fundamentally changing how banks operate and deliver value to customers. It's a continuous, cyclical process that requires ongoing innovation and adaptation in response to many factors, including customer expectations, technological advancements, and regulatory changes. But if you can pull it off, you’ll help create a more efficient, customer-centric, resilient banking industry — and if you’re anything like us, that’s what you’re in this industry to accomplish.

In the next blog in this series, we'll explore the concept of banking flywheels and demonstrate how they can help future-proof your institution for the years to come.

For more information, check out our Banking Reinvented podcast, where Backbase Founder/CEO Jouk Pleiter dissects similar topics alongside Tim Rutten, EVP/Chief of Staff, and other digital leaders. Stay tuned as they chat about everything from progressive modernization to decomposing your bank’s complexity.