Digital Transformation: What It Means for Modern Banking

Through their digital transformation investments to date, banks have built impressive launch pads for uncommon growth but most have yet to fully take flight. That’s the main takeaway from The 2021 State of Digital Transformation research from Altimeter, a Prophet company.

This post highlights the findings from Altimeter’s research on the banking industry – where it is today, how it compares to other industries and future priorities. Despite the potential to generate stronger returns on their digital investments, banks have typically been ahead of their peers in other sectors. In fact, we expect that banks will be among the first firms that shift the conversation away from digital transformation and toward ongoing digital fitness and digital value propositions.

Digital Transformation in Banking

Banks Prioritize Innovation and Gear Up for Increased Demand for Cybersecurity and Cloud Tech

Banks bring particular strengths to the game of transformation. For instance, banking respondents indicated that their firms have more mature data management practices than firms in other sectors. That’s no surprise, given the industry’s focus during the last decade on building out such capabilities.

Still, there is plenty of room for improvement. Notably, banks have achieved only average maturity in data science, suggesting that they can do more in exploring data and converting it to actionable insights. It seems that banks have figured out the mechanics of capturing, storing and retrieving the data, but are still working out how to best use that data to win.

The insights generated by skilled data scientists will be essential to developing the next generation of digital products, a top priority for banks. Indeed, banking respondents were more likely to cite “innovation and new products/services” as the top goal for digital transformation, compared to other industries. In contrast, transformation investments in other sectors were focused on replacing outdated tech and cutting costs. The implication is that banks have already realized those first-order benefits by digitizing many processes, though they are still pursuing innovation and higher degrees of customer-centricity, a topic we explore in greater detail in our research report Executing on Customer-Centricity.

Banks were also rated as highly mature in customer journey mapping, a foundational capability that sets the stage for innovation in product development. Our research showed that banks are more advanced than their peers when it comes to digital marketing, suggesting banks can successfully execute their go-to-market strategies once-innovative products are ready to launch.

Cybersecurity and cloud platforms were the top areas for future technology investments for the industry. Strong protections against data breaches are essential as banks try to digitize every aspect of their operations and prepare for likely new data privacy regulations. The good news is that cloud migration can help strengthen security, provided banks take a strategic approach and engage the right partners.

Digital Growth and Value Creation Opportunities in Banking

Building on the strong foundations – or launching pads – they’ve built through digitization, banks can take on bigger, bolder and more creative innovations. Yes, digital must be optimized as a channel, both for servicing and marketing, but banks must go further, rethinking the very definition of a product for the digital age.

Tomorrow’s top products will be those that combine multiple components – interest rates and credit access, rewards and discounts, security and protections, tailored experiences, relevant and value-adding content, software and algorithms – in ways that singularly meet the needs of individual consumers. The most successful products will be so frictionless and intuitive as to seem magical.

“Tomorrow’s top products will be those that combine multiple components.”

More holistic offerings keyed to life events and “moments that matter” (e.g., buying a home, saving for college or planning for retirement) will certainly be part of the solution. People will choose banks that can help deliver greater financial security and confidence, not just free checking and cash-back credit cards. No bank has yet executed such a vision at scale, but those firms that succeed at digital transformation (whether they are traditional banks, fintechs or super apps) will have a head start.

Innovation is as much a question of how as it is of what or why. Banks have the technology they need to innovate with new products and services. But actually, developing such offerings requires greater synchronization and internal coordination among different functions and product lines. Banks that simultaneously transform departments and align them to overarching strategies will achieve the digital interdependence necessary to launch an entirely new business and operating models (e.g., ecosystems).

These changes won’t be easy. Breaking down organizational barriers, reworking incentives and compensation structures and re-aligning profit-and-loss accountability are extremely difficult. However, for banks in 2022, these changes are imperative to prepare for the customer-centric future that’s taking shape across banking.

Follow Their Lead: Three Digital Lessons from Banking Winners

Our study’s findings also highlight a few specific practices embraced by banks that are farther along on their transformation journeys. The following actions can help banks prioritize investments and next steps in line with their strategic objectives.

1. 1. Design transformation programs for innovation and growth. Prioritize new product development and experience enhancements over simple process streamlining, automation and cost reduction.
2. 2. Formalize innovation programs. Set outcome targets based on structured processes and timelines, use benchmarks and metrics to standardize funding models and clearly define testing protocols.
3. 3. Explore data for actionable insights. Unify and explore data sources to produce richer customer insights that extend across product lines (e.g., mortgage lending, private banking) for personalized offers and more precise segmentation (e.g., based on lifetime value).