Few people would argue the power that technology has in shaping the global economy. Yet, while some industries have been on the leading edge of this shift, banks and financial institutions have lagged behind.
This banking digital transformation whitepaper covers the rise of neobanks, changing consumer demands, advanced technology, existing prehistoric systems & processes, and how they'll force traditional banks to embrace a digital transformation strategy or risk becoming technologically obsolete.
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Table of ContentsTraditional Banks are at Risk of Becoming Technologically Obsolete
- What is Digital Transformation in Banking?
- Not Slowed Down by Legacy Systems
- Open Banking and Integration
Case Study: FinTech Firms Offering Creative Services
- Lean Business Model
Case Study: The Death of Brick-and-Mortar Branches
- Access and Utilization of Better Talent
- Speed and Agility
- Specialization and Niche Markets
- Banks Need to Move Quickly to Get Ahead of Digital Disruption
- Rapid Market Growth in APAC
- Evolution of Banking Technology
- Early Adoption Advantage
Don’t Miss Out on the Digital Revolution
Traditional Banks are at Risk of Becoming Technologically Obsolete
We’ve identified key components that have major banks struggling to compete with the rise of neobanks and FinTech firms that are bringing the latest technology to consumers. In this whitepaper, we’ll deep dive into how banks can work to overcome these six challenges.
- Legacy Systems - Major banks are plagued with legacy technology systems that are slow and incompatible with modern technology.
- Open Banking and Integration - Consumers are demanding greater insights into their personal finances and features that provide a better ability to interconnect multiple accounts and access cutting-edge functionality.
- Lean Business Model - Unlike neobanks that have a low-cost operating model, traditional banks are massive organizations with extremely high overhead.
- Access to Talent - Younger, tech-savvy workers are drawn to technology innovators and look to avoid working with old, outdated technology.
- Speed and Agility - Neobanks have small, nimble teams giving them the ability to respond faster to changes in the market and technology. New market entrants can also arrive with little to no notice making it difficult for traditional banks to pivot quickly.
- Specialization - Most traditional banks have a wide range of customers making their products and services applicable to the average consumer. Smaller, agile firms are better able to specialize and target smaller segments of the market.
What is Digital Transformation in Banking?
Digital transformation in banking is the operational and cultural shift towards integrating digital technology into all areas of the bank, optimizing operations and value delivery to customers. If executed successfully, digital transformation can improve the bank’s ability to compete in an increasingly crowded market.
While the backbone of digital transformation is, of course, technology, this isn’t a magic bullet on its own. Banks that can successfully implement their digital strategies could see tremendous benefits.
However, many digital transformations fail because technology is the only option or solution considered. Banks will need to be smart about which technologies they choose and how they will be deployed. They will also need to address cultural challenges and mindsets that restrict a company’s ability to adapt to new technologies. For more context, check out our article on building a digital transformation roadmap.
We believe that timing is extremely critical. According to our research, banks have a unique opportunity right now to overhaul processes and execute digital transformation strategies. Immediate action could be mean the difference between survival and failure over the next decade.
Neo-Banks Are Threatening the Banking Industry
Neobanks are causing major headaches for traditional banks across the globe. While banks are no stranger to competition, neobanks bring a new level of technological sophistication, speed, and agility that is nearly impossible to keep pace with.
Based on our research, we believe that this is the single biggest threat that could transform the way the banking and financial industry looks over the next decade. There are some key factors why neobanks are thriving in this digital world.
1. Not Slowed Down By Legacy Systems
Most banks in operation today were around before the digital age. Normally, being a well-established firm with decades of experience is a great thing, but not when it comes to technology. Many legacy technology platforms that traditional banks use today are extremely outdated.
They have been altered and updated numerous times over the years leaving banks with systems that aren’t easily adaptable or compatible with the latest technology. This is the single biggest hurdle that will prevent major banks from being able to keep up with the digital banking revolution.
Neobanks have the advantage of starting with a clean technology slate. They aren’t burdened with trying to work with old, outdated infrastructure. Without major limitations, neobanks can easily implement the tools, features, and integrations that the modern consumer expects. The cost for established firms to update their aged systems is steep. Many can easily expect to spend hundreds of millions of dollars rebuilding their legacy systems.
Older technologies also have a higher risk of outages. In 2019, the Commonwealth Bank of Australia suffered an 18-hour outage that left customers stranded. This wasn’t an isolated incident. In 2021, CBA’s payment system went down three times in a single week. CBA isn’t the only member of the Big Four to experience issues with their legacy systems. In 2021, both ANZ and Westpac had major technology problems which left their customers unable to access their online accounts for several hours.
These clunky legacy systems are also painfully slow and require a frustrating process for even simple tasks. A great example is the onboarding of new customers. Many traditional banks still rely on human account managers and loan officers to set up new client accounts. Most neobanks can set up new customers in just a few seconds and approve loan applications 20% faster than traditional banks. In an age where consumers are accustomed to instant gratification, neobanks have a significant advantage.
Finally, these technological advantages also impact the companies' ability to provide the level of cybersecurity that consumers expect from their financial institutions. Cybersecurity threats are keeping pace with modern technology. This leaves legacy systems vulnerable to new cybercrime threats which explains why traditional banks experience a high rate of breaches. Since neobanks aren’t operating on outdated systems, they have better flexibility to implement the latest security technologies.
It would be unfair to suggest that traditional banks haven’t attempted to address some of these challenges. For example, ANZ was the first to launch a P2P payment app in Australia (GoMoney). While this was groundbreaking at the time, there are lots of other options available on the market today. Many pop-up firms are bringing stiff competition and are very attractive to investors who are willing to support the continued development of new tools and technologies.
While each of the Big Four has brought its own technological advances to the table, they have moved slowly. In many cases, they have implemented technology that barely meets the minimum expectation of consumers. Historically, these firms haven’t faced major market pressures due to their size, so there was no incentive to be adaptive.
Key Takeaway: Executives need to focus on embracing a digital-first business model and commit to complete overhauls of technology systems. Many executives will make the mistake of thinking that this can be solved by throwing millions of dollars at technology systems expecting a “silver bullet”. This is a problematic mindset that will hold many companies back. Technology implementation needs to be drastic, but also thoughtful.
Leaders should urge their teams to avoid chasing a technology that is trendy in the industry. While there is safety in consensus, following the crowd could result in mediocre or negative benefits. Instead, focus efforts on identifying operational inefficiencies and the underlying root causes. In many cases, minor refinements of existing technologies could solve some of the pain points.
2. Open Banking and Integration
The days of siloed banking systems are gone and traditional banks need to find new ways to accept this change. Consumers are ready and willing to embrace a model of open banking that allows their financial data to be shared across multiple third-party systems. These open banking systems can use the customer's data to provide additional insights (such as how much money they are spending on certain expenses), aggregate data (to view all multiple accounts in one place), or offer customized financial products.
Neobanks are better positioned to provide open banking solutions through the use of APIs (Application Programming Interfaces). They understand that consumers no longer need or want a one-stop solution when it comes to their banking and financial needs. In 2020 alone, the number of open banking applications nearly doubled in some major markets. With open banking solutions becoming commonplace, traditional banks need to embrace this new approach or risk driving customers away.
This is likely where major banks can gain an advantage. One of the biggest challenges that neobanks and FinTech companies face is that they haven’t built their reputation in the market. It takes a lot for consumers to trust their financial data to a company that they have never heard of before. Traditional banks can leverage open banking in conjunction with their well-established brand to bring new technology to their customers.
Slyp, a FinTech company that specializes in smart receipts, has captured the attention of the Big Four. Through Slyp’s innovative platform, consumers would receive an itemized smart receipt after simply using their existing bank card. This is a simple, yet powerful, perk that banks could offer their existing customers by partnering with Slyp. The company recently raised an additional $25 million to fund its technology development, much of which came from the Big Four.
This is just one example of how major banks can bring fresh ideas and technology to it’s existing customers without making major investments in R&D or product development.
Key Takeaway: Banks should think beyond their organization for digital transformation options. In some cases, there are existing third-party services that banks can leverage by simply giving their customers the ability to access and share the details of their financial information.
Case Study: FinTech Firms Offering Creative Services
Traditional banks make a lot of money charging customers account fees and interest on loans. Each year, the Big Four bring in nearly $30 billion in cash earnings with the average Australian household paying $425 on bank fees. These fees are necessary for banks to cover their high operating costs, but new FinTech firms are emerging that could threaten this steady flow of income.
Created in 2019 by a group of ex-bank executives, Finspro is an Australian FinTech company that is dedicated to helping its customers make smarter banking decisions, saving them thousands of dollars. Customers simply download the Finspro app on their mobile device and link their existing accounts. The Finspro algorithm evaluates the accounts and makes free recommendations on how they can save money on bank fees and interest. These recommendations could range from adjusting mortgage payment schedules, closing low-use accounts, or changing banks altogether.
With FinTech firms helping to provide this form of visibility and guidance, they could disrupt the industry as they steer the consumers away from traditional banks that fail to remain competitive.
3. Lean Business Model
Neobanks require a significantly smaller workforce due to their ability to function on an entirely web-based business model. Traditional banks don’t have this luxury as many are slowed down by bloated workforces, cumbersome internal processes, and hundreds of brick-and-mortar locations. Not only does this give neobanks the ability to operate just about anywhere, but they can do it at a much lower overhead and operating cost. Setting up new services for their customers or rolling out new technologies doesn’t require a major effort.
Up Bank is one of the largest neobanks in Australia. With approximately 100 employees, they are able to service nearly half a million customers and continue to grow rapidly. Meanwhile, the Commonwealth Bank of Australia employs over 43,000 employees to service 15 million customers. While this isn’t a perfect apples-to-apples comparison, it does demonstrate how lean neobanks can operate effectively with a much higher customer-to-employee ratio.
Key Takeaway: The goal of technology is to make the company more efficient. By focusing on efficiency first, rather than just the technology, banks will be able to make their organization more lean and able to compete easier against smaller competitors like neobanks.
Case Study: The Death of Brick-and-Mortar Branches
Fewer and fewer Australians are choosing to visit traditional bank branches each year. The Australian Banking Association reported that 72 percent of Australians never entered a physical branch in the September of 2021. A combination of users switching to digital banking and pressures from the COVID-19 pandemic has forced many major banks across the country to close their branches. Nearly 300 branches have closed in the last couple of years with the majority coming from the Big Four. ANZ led the pack with 131 branch closures, followed by Westpac (53), NAB (45), and the Commonwealth Bank of Australia (32).
This phenomenon isn’t just happening in Australia. According to the American Bankers Association, the number of physical bank locations has been in decline since a peak in 2008. This change has been a result of pressures on the financial sector as a result of the 2008 Financial Crisis as well as an increase in the number of consumers who are using online banking.
Some financial institutions are starting to think about what the future looks like for brick and mortar bank branches. One of the innovators in the space is Bank of America, the second-largest bank in the United States. In 2017, they decided to unveil the first-ever tellerless bank branch. Under this model, the bank would have a human-less location where customers could utilize digital screens, ATMs, and other technology to conduct their banking transactions. Through the digital screens, customers can still have “face-to-face” conversations with real bank employees if they need help.
This creative solution will allow the bank to operate branches that are a quarter the size of their normal branches saving significant amounts of money on real estate. They will also be able to allow their customer service representatives, bank tellers, and loan officers the ability to service multiple branches at the same time.
4. Access and Utilization of Better Talent
Because neobanks are on the cutting edge of technology, they are more likely to attract younger, tech-savvy workers. Positions with these organizations are often coveted by top talent because they are viewed as being forward-thinking and innovative. Their workforce tends to have a higher percentage of professionals with a technology-focused background. Having these types of workers encourages a more tech-friendly culture.
While major banks have made strides in incorporating technology into their existing platforms and processes, much of this is still superficial. Instead of having customers fill out stacks of manual paperwork to set up an account, the same processes likely exist just in the form of digital forms. This hardly counts as innovation and banks need to do better if they want to attract top talent.
Retaining legacy systems could be a major influence on talent acquisition. Older employees who are familiar with these legacy systems are beginning to retire. The knowledge required to maintain outdated technology is not being transitioned at a sufficient rate to younger employees.
In addition, older programming languages and technologies are not being taught at universities as there is little demand in the marketplace. Most young people have no interest in learning systems that no longer have widespread use and adoption.
Even if the Big Four and other major Australian banks manage to attract fresh, tech-savvy employees, major changes to company culture will still be needed. Currently, traditional banks operate with an old-fashioned top-down management approach. Unfortunately, many leaders and executives lack the foresight and technology-focused vision to steer the organization through a digital transformation.
Neobanks promote a more inclusive approach to driving innovation. The culture in neobanks allows for the open flow of information and recommendations from their workforce to help shape the direction of digital offerings. In many cases, they leverage digital tools and platforms to help embrace this mindset. Traditional banks can learn a thing or two from this strategy. The Big Four can try and throw money at top talent, but won’t see much benefit if the information is flowing the wrong way.
Key Takeaway: Bank executives should focus on changing the culture of the company to be more innovative by recruiting tech-savvy talent and encouraging the existing workforce to embrace digital changes. The biggest change will need to occur in the way information and ideas are shared. Currently, most traditional banks use top-down management to guide the company. This is holding companies back as tech-savvy workers can provide invaluable thoughts on how to best innovate.
5. Speed and Agility
The Big Four control about 80% of the entire Australian banking market. This level of power and control might seem overwhelming for smaller market entrants. Unfortunately, this level of confidence (or arrogance) could leave traditional banks vulnerable to dozens of micro-competitors coming in to siphon off market share. For neobanks, their small size and ability to quickly ramp up operations allows them to catch unsuspecting banks in their crosshairs. For example, neobank Judo was founded in 2016 and has quickly reached a $1.6 billion valuation as of May of 2020. Large Australian banks are not equipped or prepared to adapt this quickly to new emerging threats.
Some banks have unsuccessfully tried to buy out these neobanks while they are small and incorporate or shut down their businesses before they become a threat. This is why in 2021, NAB acquired 86 400 which secured over 200,000 new accounts equating to $300 million in just a year. The challenge is that new neobanks are emerging every day. Snuffing out one of these companies today might work in the short term but they will quickly be replaced with another. With projections that the neobank market will increase 15 fold by the year 2028, the old tactics of mergers and acquisitions will no longer be effective.
Key Takeaway: Despite having significant financial resources, traditional banks won’t be able to acquire enough neobanks to make a difference in their market impact. Instead, they should focus their resources on funding initiatives that can compete directly with these companies.
6. Specialization and Niche Markets
Most traditional banks have tried to remain neutral when it comes to their customer base. Their goal has been to provide value to the greatest number of individuals securing the highest revenue. Some neobanks have taken the entirely opposite approach narrowing into their target audience in ways that traditional banks wouldn’t dare.
Daylight is a neobank that is dedicated to servicing the LGBTQ community by offering incentives to its customers that frequent LGBTQ-owned or allied businesses. This niche-market approach could be effective for neobanks as they become intimately familiar with their consumer. Traditional banks aren’t ready for this level of granularity in servicing their customers. Experience is extremely important to the modern consumer, so they are less likely to bank with a company that treats them as a number rather than a member of a community.
Key Takeaway: Traditional banks should look to technology that helps customize their products and services for specific customer bases. Broad approaches will no longer be effective in the market.
Digital Transformation in Financial Services
Banks Need to Move Quickly to Get Ahead of Digital Disruption
Over the last few decades, banks have faced a number of challenges and threats that are rapidly changing the industry. New technologies and competitors are emerging that have the potential to disrupt many large financial institutions if they are not prepared. Many of these changes are even challenging the definition of what constitutes an official bank. As new services and consumer demands appear, the lines between traditional banking and innovative financial services have become blurred.
Digital disruption is the leading cause of the pressure being placed on traditional banks and financial institutions. In fact, Goldman Sachs estimates that these disruptions could result in a $4.7 trillion loss in annual revenue from traditional financial institutions. These disruptions come in many forms from innovative startups, new technology, market pressures, and government regulations.
Rapid Market Growth in APAC
North American and European banks have long dominated the world financial stage. This is changing as the financial center of the globe shifts to other markets, specifically Asia. A decade ago, the largest 10 banks were based in Europe and the United States. Today, the majority of these top banks are located in Asia. Some of this can be attributed to financial leapfrogging which occurs when nations who are behind on technological advances skip development stages. For example, a developing country can jump to mobile phone technology without having to first build an extensive network of landlines.
Australia stands to benefit from Asia’s emergence as a global economic powerhouse with an abundance of natural resources and proximity to the region. Since the financial sector in Australia makes up a large portion of the overall economy (approximately 8.5% which exceeds that of most other developed economies) banks need to prepare for an influx of new capital and expanded customer bases.
Evolution of Banking Technology
According to BDO’s 2021 Financial Service Digital Transformation Survey of 100 c-suite executives at leading banks and credit unions, nearly half have committed to accelerating their investment in technology. In 2018, companies in the banking industry spent over $9.7 billion on transforming their digital offerings to customers.
This level of investment indicates that technology for the banking industry is maturing with new tools and technology suppliers emerging every day. These new technologies come in the form of cloud computing, big data, blockchain technology, and artificial intelligence (AI).
Early Adoption Advantage
Financial institutions are historically slow at adopting new technologies because of high levels of regulatory oversight and the need for strong data security. Rapid technology changes could leave companies vulnerable to cyber attacks or fines from regulators. However, this doesn’t mean that banks should ignore the wave of technological advances that are coming. According to one report, two-thirds of banks in APAC could become obsolete if they fail to implement digital strategies.
The good news is that Australian banks that chose to embrace digital transformation right away will have the advantage. Approximately 70 percent of banks and other financial institutions have not begun implementing their digital transformation strategy. This opens the door for companies that want to be early adopters of new technologies and secure a reputation for being ahead of the game.
Don’t Miss Out on the Digital Revolution
Over the next 5 to 10 years, technology in the banking industry will be unrecognizable compared to today. The sooner industry leaders recognize and accept this fact, the faster they can move to execute technology strategies that will help them remain competitive and relevant in the digital world. Failing to embrace technology could lead to inefficiencies, loss of market share, and inability to keep up with their peers.
There are many benefits that digital transformation brings to banks. However, the project must be planned and executed properly. Failed digital transformations can result in data quality issues, customer frustration, and the cost to replace the new systems. It’s estimated that the average company loses over $5 million on failed digital transformations.
For multi-billion dollar corporations, these costs can be even higher. However, many of the mistakes can be mitigated with a detailed and well-executed strategy. Now if only there was a strategy execution platform to execute a digital transformation in…
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