Banks should leverage digital technology to drive transformation

T

he financial services industry is going through dramatic changes as a consequence of changing customer behaviour, increasing expectations, channel proliferation, disruption, innovative use and adoption of new technologies and the digitisation of business and society in general.

Retail customers have adopted digital banking services en masse during the Covid-19 pandemic, as high street branches remained closed and cash transactions plummeted.

In short, the Covid-19 pandemic has forced more people to take to the web and embrace digital banking in a way they never had before. Many banks are rethinking their digital strategy as a result.

“The pandemic has increased pressure on today’s banks to accelerate new transformation efforts that will help them meet customer needs while also reducing costs and driving continuity,” Wajsblat says.

“As a result, banks have turned to digital tools to help deliver efficiencies, model disruption, and identify new opportunities to drive growth in a changing market landscape.”

“Branch density has steadily declined over the past 20 years as retail banks continue to invest in more digital offerings to meet changing customer preferences,” Wajsblat continues.

“Adopting a digital-first strategy should be a priority whether to sell products or provide services to customers.”

Beyond shifting customer preferences, Wajsblat says retail banks are leaning on digital technologies to accelerate efficiencies and reduce costs.

“A low-interest-rate environment has kept banks’ interest income under high pressure while high operating expenses continue to weigh on profitability. And with rising loan loss provisions caused by the pandemic, a deterioration of cost-to-income ratios has occurred.

“By shifting to digital channels, retail banks can embrace a more efficient and effective workforce model to help reduce costs and drive profits.

“Finally, digital innovation enables retail banks to diversify their non-banking services and find new non-interest income sources of revenue.”

While security and cost-efficiency are strong motivators for banks, the true value of digitisation is what it can do for the customer.

“As banks continue to accelerate their digital transformation journeys, reducing costs and improving customer experience should be top priorities, but how each bank approaches this journey will likely be dependent on other considerations,” notes Wajsblat.

“Some banks may decide to downsize or differentiate their branches to meet customer demand across their networks. Others might merge branch networks to optimise branch location strategy, drive network synergies and eliminate redundancies.

“Finally, some banks will supplement their digital offerings with large branch networks as a way to offer physical access to a bank within twenty miles of wherever customers live.”

Banks have been targeting customer microsegments and tailoring offers to them for decades. These capabilities, until recently, have been sufficient to help banks differentiate their institutions, build customer engagement and gain competitive advantage. But this advantage is eroding.

Banks are being leapfrogged by retailers and tech-savvy companies that put personalisation at the centre of their business models and successfully scale it to achieve significant performance gains.

“There is no one-size-fits-all solution for branch networks, but finding the right balance between physical and digital services will require transformation across other bank areas.

For instance, there will likely be a significant transfer of in-branch resources toward contact centres and digital teams in the coming years. This shift will require banks to adjust their workforce models accordingly.

“Planning for the future of the workforce will be a key success factor of the branch network transformation.”

Wajsblat concludes that embracing artificial intelligence and machine learning will enable banks to create technology taskforces to better serve their retail customers.