Digital Transformation in Banking: What it means for businesses

Almost 30 years ago, Bill Gates said that we need banking, but we don’t need banks.

He was a bit naive. Banks are still relevant, as they remain the symbol of handling money in a trusted way. 

But consumers get to choose now — neobanks, fintech solutions, digital technologies for stock exchange, and mobile apps from the banks that were previously too far to get to.

Where is choice, there is competition. And the richer the choice, the bigger the need for real change and innovation. 

No wonder, digital transformation in the banking sector is a multibillion industry now. But not all of it is done right. Hell, McKinsey says only 30% of it is done right.

Why so?

Is there a chance to increase the odds?

Which real-life business metrics are there behind transformation initiatives? 

We got curious. We got some answers. And here they are.

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Why Banking Had To Move Towards Digital Transformation

It’s not like banks wanted to change. Any change is an expenditure and risk, and bankers hate both.

When you are an absolute monarch, you don’t have to make your subjects happy because they don’t get to vote you out. They can overthrow you during a bloody revolution, though. To avoid such perish, banks transform.

This, and a few more reasons:

Technological advancement

Legacy systems couldn’t keep up with the demands for real-time processing, mobile banking, and personalized customer experiences. Specifically, many banks were using outdated core banking systems built decades ago, which were batch-processed and couldn’t handle real-time data. 

Systems that struggled most with integrating new digital channels and banking services,:

  • Mobile banking apps
  • Online Banking Portals
  • ATMs
  • Digital Wallets
  • Chatbots and Virtual Assistants
  • Open Banking API

These channels require robust, flexible, and scalable systems to ensure seamless and efficient customer experiences. Claiming you are ready for digital innovation should only happen once you are sure the list above will be covered.

Consumer expectations

Modern consumers expect seamless, 24/7 access to banking services. Even not particularly tech-savvy ones demand more convenience and accessibility, similar to what they experience in other industries. 

This digital banking transformation demand is formed by the new way we are using financial services daily. 

  • Around 20 years ago: 5-10 transactions per month, mainly including cash withdrawals, check deposits, and occasional fund transfers.
  • Now: 10-20 transactions in a day, including mobile payments, online shopping, bill payments, peer-to-peer transfers, and investments.

QArea case: Digital features that retain clients

The more a user can do on a single digital platform, the more likely they are to choose it over competitors. For example, we worked with a stock exchange platform popular in the Gulf region, which was also used for various banking and financial services. During our QA testing, we noticed that users often left the platform after using the stock filter option.

Digging deeper, we realized that users had to Google which stocks were eligible according to Islamic banking principles before investing. We recommended integrating this feature into the stock filters. After implementing this change, we saw a dramatic decrease in abandoned “stock carts.”

Fintech Disruption

Fintech companies emerged as tough competitors to the traditional banking industry. They offered user-friendly, transparent, and often cheaper financial services. This competition from agile startups forced banks to rethink their strategies and adopt digital solutions to stay in the game.

To be fair, it is not that black and white. Fintech offers another level of digital engagement, but it doesn’t immediately outperform classical financial institutions in regard to all products and services.

Here is a brief comparison:

AspectTraditional BanksFintech Companies
Core TechnologyLegacy systems, often mainframe-based.Modern, cloud-based platforms.
Data ManagementCentralized databases with batch processing.Distributed databases with real-time processing.
Innovation SpeedSlower due to complex approval processes.Fast, iterative development and deployment.
Government BackingStrong government backing and regulation.Increasingly regulated, but initially less oversight.
Security MeasuresExtensive, traditional security protocols (e.g., two-factor authentication, SSL).Advanced security technologies (e.g., biometric authentication, blockchain).
ComplianceStringent compliance with extensive regulatory frameworks.Adaptable compliance with emerging regulations.
Risk ManagementEstablished risk management frameworks.AI and machine learning-driven risk management. AI in banking is just developing.
Financial BackingLarge capital reserves, government guarantees.Venture capital and private investment (don’t confuse with traditional investment banking)
Customer TrustHigh trust due to long-standing reputation and heavy government and international regulations.Building trust through transparency and innovation. Conservative users are still on the verge. 
InsuranceGovernment-insured deposits (e.g., FDIC in the US).Often no government insurance, but may offer private insurance options.
Transaction SpeedSlower due to older infrastructure.Fast, real-time transactions enabled by modern technology.

Regulatory Pressure

New regulations have significantly impacted the banking sector, demanding greater transparency, security, and efficiency. These regulations have pushed banks to invest heavily in digital infrastructure and cybersecurity, driving their digital transformation. Here are some key regulatory areas and their implications:

  1. Know Your Customer (KYS)
  2. Anti – Money Laundering
  3. General Data Protection Regulation (GDPR)
  4. Payment Services Directive 2 (PSD2) (third-party access to customers data with their consent, promotes banking API’s)
  5. Dodd-Frank Wall Street Reform and Consumer Protection Act (stringent reporting and compliance)
  6. Basel III (risk management for banks. Done more easily with real-time financial monitoring tools).

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Real-Life Problems with Digital Transformation in Banking

If all the right reasons and big user demand are there,

then why there are much less successful digital transformation cases than one would expect?

“Of the almost 250 challenger banks in the world, only 13 are profitable as of end-2021,” states Asian Business Review quoting Boston Consulting Group (BCG). 

McKinsey reports that “Only 30 percent of banks that have undergone a digital transformation report successfully implementing their digital strategy, and the majority fall short of their stated objectives.”

Transition to digital services for traditional banking systems depends on much more than a wish and PR exercises. It all comes to two mistakes exactly: underestimating and overestimating some critical facets of digital banking journey. 

UnderestimatingOverestimating
Complexity and costSpeed of investment return
Technical debtAbility to measure efficiently
Organizational silosPace of change
New regulation complexityAccess to niche-trained digital talent

Let’s discuss a little more context regarding these challenges and how ignoring them can cost you success in digital transformation crusade. We will separate digital challenges as business and technical, so you can see and preliminarily estimate which transformation efforts to prioritize in your case. 

Вusiness realities 

Budgetary constraints

Digital transformation initiatives often require significant upfront investments, which can strain already tight budgets. Banks must carefully prioritize projects based on ROI and long-term strategic value.

Talent acquisition

Driving digital transformation in banking requires top talent steering the wheel, and enough reliable subject matter experts that do actual job. Attracting and retaining top tech talent is a major challenge for banks, as they compete with tech giants and startups. Banks need to offer competitive compensation, benefits, and opportunities for growth to build strong in-house tech teams.

Balancing innovation and risk

Banks must find the right balance between embracing new technologies and managing associated risks (like handling Big Data in banking). Overly cautious approaches can hinder innovation, while reckless adoption can expose banks to financial and reputational damage. When banks migrate to digital platforms, security spending can “eat” much more of initial transformation budgets than expected. 

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Deutsche Bank’s digital transformation journey has been plagued by implementation challenges, including multiple project delays and cost overruns. In 2015, the bank announced a €1 billion investment in digital initiatives, but progress has been slower than expected due to the complexity of overhauling legacy systems. 


Measuring success

Banks need to establish clear KPIs that align with business objectives and demonstrate the tangible impact of their efforts.

Defining and tracking the right metrics for digital transformation initiatives is more complex than we will make you think in the next part of this article. Yes, there are metrics that banking and financial institutions use already, and they can be combined with classical digital indexes. However, there is still nothing close to what we can call the best digital banking practices and metrics. Technical realities

Data quality and integration

Banks often struggle with siloed, inconsistent, and poor-quality data. Cleaning, integrating, and maintaining high-quality data across systems is a massive undertaking, especially when providing a wide range of digital services.

Scalability and performance

As banks digitize more processes and services, they need to ensure their systems can handle increased traffic and transactions. Scalable architectures, load balancing, and performance optimization are critical.

Vendor management

Banks often rely on third-party vendors for various components of their digital infrastructure. Managing these relationships, ensuring seamless integration, and maintaining visibility into vendor performance can be challenging.

Continuous improvement

Digital transformation is not a one-time event but an ongoing process. Banks need to establish a culture of continuous improvement and regularly assess and update their technologies, processes, and skills to stay ahead of the curve.

So, how can you craft a successful digital transformation strategy and, for sure, “conquer the banking landscape”? You can’t and don’t trust anyone who promises you that. 

You can face the challenges everyone faces in a global digital banking platform market and be vigilant about measuring key metrics that will help you move in the right direction.

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What Gets Measured, Gets Done: Digital Banking Metrics

Here are some examples of digital transformation metrics that can be used in the banking industry. There are plenty more, but these are the most critical ones for taking the temperature of your digital transformation journey.

And for any other coeficients and indexes you want to count, just use these ones as example of how calculation and result analysis can be done — from simple math to Likert and Emoticon survey lists.

Return on Digital Investments (RODI)

This metric measures the value provided by individual priority digital initiatives, helping banks assess the effectiveness of their digital investments.

  1. Cost of Investment (COI). The total cost of implementing a digital initiative, including hardware, software, labor, and other expenses.
  2. Net Gain from Investment (NGI). The net gain from the digital investment including increased revenue, cost savings, and improved efficiency.
  3. Return on Digital Investments (RODI). The ROI by dividing the net gain from the investment by the cost of the investment and multiplying by 100:

For every dollar invested, the digital initiative generated a return of $1.50. Not bad! 

Achieving digital transformation in the banking and financial sector in general  is hardly possible without focusing heavily on RODI and ways to improve it. This is the way to outsmart those banking leaders who are just starting their digital change. 

How to strengthen RODI

  • Optimize digital initiatives and prioritize those with high potential for revenue growth, cost savings, or operational efficiencies.
  • Enhance digital customer experiences such as mobile banking apps, online account opening, and intelligent chatbots.
  • Upskill digital talent by training, hiring, and retaining top digital talent to ensure the necessary skills for digital transformation.
  • Implement Agile methodologies and practices to enable faster iteration, testing, and deployment of digital solutions.
  • Partner with Fintech to leverage their innovative technologies and capabilities.

Digital Adoption Rate

The Digital Adoption Rate is a Key Performance Indicator (KPI) that measures the percentage of customers who have adopted digital channels to interact with their bank, indicating the level of customer adoption and engagement.

Digital Adoption Rate = (Number of Customers Using Digital Channels / Total Number of Customers) x 100

How to boost DAR

  • Segment the data to gain insights into specific customer demographics or regions that may require targeted digital adoption strategies.
  • Offer incentives, promotions, or personalized communication to encourage higher digital adoption rates among customers.
  • Invest in user-friendly interfaces and robust digital banking features to enhance customer experience and drive higher adoption.

Customer Effort Score (CES)

It measures how much effort customers have to exert to interact with a company, resolve an issue, or complete a specific action. It is typically calculated by asking customers to rate their experience on a scale from “very easy” to “very difficult” or using emoticons to reflect their level of satisfaction.

 Customers who have a low-effort experience are more likely to be loyal and return to the company. Transformation in the banking industry is, in the end, driven by the idea of making it easier for the clients to use the banking products without loosing trust.

How to Improve CES

  • Reduce friction points. Identify and eliminate obstacles that make it difficult for customers to interact with your company.
  • Proactive support. Provide proactive support to customers, anticipating and addressing their needs before they have to ask.
  • Self-service options. Offer self-service options to reduce the need for customers to interact with your support team.
  • Multiple communication channels. Provide multiple channels for customers to contact your support team, such as phone, email, or live chat.

Digital Talent Index 

Measures the availability of digital skills within an organization, ensuring that banks have the necessary talent to support their digital transformation.

Digital Talent Index (DTI) = (Number of Employees with Digital Skills / Total Number of Employees) x 100

How to improve DTI

  • Segment the data to gain insights into specific departments or teams that may require targeted digital talent strategies.
  • Offer training programs, mentorship opportunities, and competitive compensation packages to attract and retain digital talent.
  • Invest in digital upskilling and reskilling initiatives to ensure that existing employees have the necessary skills to support digital transformation.

We don’t believe that there are companies that achieved success of their digital transformation without following key metrics closely. There are so many points, at which you can fail, that you need immediate numbers on the table to see the dinamics at any given time. 

Digital Technologies Working for Financial Services

How does banking digital transformation actually look like? How far beyond digital account opening and general usage of cloud technologies in banking does it go? 

We’d like to predict digital future of banking software development, so you can right away invest in key disruptors, but we can’t. What we can, is to show you which digital products are already assisting transformation process in banking at each UX defining point. 

Opening a New Account

Application

Robotic Process Automation (RPA) — to pre-fill application forms with customer data from various sources.

Optical Character Recognition (OCR) — to digitize and extract information from physical documents.

Verification

Biometric authentication, such as facial recognition or fingerprint scanning, to verify customer identity.

Blockchain-based digital identity solutions to securely store and validate customer information.

Transferring Funds

Verification

Machine learning algorithms — to analyze transaction patterns and detect potential fraud in real-time.

Integrating with third-party payment gateways and APIs to enable seamless, cross-border fund transfers.

Execution

The speed and transparency of blockchain technology to process fund transfers.

Serverless computing and event-driven architectures to scale transaction processing efficiently.

Checking Account Balance

View Balance

Interactive data visualizations and dashboards powered by business intelligence (BI) tools.

Natural language processing (NLP) to enable voice-based account balance inquiries through virtual assistants.

Insights

Predictive analytics and machine learning to generate personalized spending insights and rommendations.

Integrating with customers’ financial management apps to provide a holistic view of their financial well-being.

Paying Bills

Verification

Computer vision and machine learning to automatically extract and validate bill details from images or PDFs.

Intelligent chatbots — to guide customers through the bill payment process.

Execution

Internet of Things (IoT) — to enable seamless, automated bill payments based on usage data (e.g., utility bills).

Digital wallets and mobile payment platforms for frictionless bill payments.

Investment Management

Selection and Portfolio Management

Financial data APIs — to offer real-time market insights and performance analytics

Robo-advisory services powered by machine learning algorithms to automatically rebalance portfolios based on market conditions and customer preferences

Transactions and tracking

Blockchain technology to facilitate secure, transparent, and near-instant settlement of investment trades.

Interactive dashboards and visualizations to help customers monitor the performance of their investment portfolios.

Predictive analytics and AI-powered forecasting models to generate personalized investment performance projections and recommendations.

Personalized advice

Virtual financial advisors powered by natural language processing (NLP) and conversational AI to provide personalized investment guidance.

Customer data and behavioral analytics to deliver tailored investment strategies and financial planning recommendations.

Tax and Regulatory Compliance

Integrating with tax preparation software and regulatory databases to automatically generate tax reports and ensure compliance.

Robotic process automation (RPA) — to streamline the handling of regulatory filings and audits.

We bet it is a lot to comprehend — but these are some basics that stand behind digital transformation of banking systems, that should be done by professionals, according to new regulations and demand dynamics in the market. 

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