Digital transformation in retail banking is shifting gear

The Covid-19 pandemic has pushed an increase in digital communication between customers and their banks. Financial institutions should respond to this by accelerating investments in digital transformation in the banking sector, a new study recommends.

“Who would have ever thought that people would not want to work with money anymore,” Alexander Eerdmans, Market Lead Financial Services at Capgemini Invent asked, “or not even enter their pin number to pay with a debit card for fear of contamination?”

The first half of 2020 has transformed the way many people think about interacting with their money, however. As many as 57% of consumers worldwide now prefer online banking, compared to 49% before coronavirus, according to Capgemini's World Retail Banking Report 2020. Meanwhile, 55% now favour using mobile banking apps – spiking from 47% before the pandemic.

Digital payments had already booming across the world of course, but the surge in support for contactless payment and digital transactions now mean that, according to the researchers, it will not be long before paper money disappears completely.

Eerdmans explained, “In Scandinavia, payment is almost entirely digital and in China payment with your phone or QR codes has been the norm for some time. We expect that these “cashless” payment methods will also be embraced in many other countries.”

Getting rid of legacy

“Consumers have grown accustomed to the ease of use of BigTechs in other parts of their lives and expect just as smooth a digital experience from financial service providers,” said Anirban Bose, CEO of Capgemini's Financial Services. “Traditional banks are additionally challenged by newcomers to the digital market who focus on the customer experience from day one.”

To cater to this shifting landscape, banks need to become internally digitised – the problem is that embedding new digital operations in an organisation is easier said than done. One of the biggest stumbling blocks for this is the potential for new tools to clash with legacy systems; old and often outdated IT systems which no longer meet the current needs of society and internal business.

According to Capgemini, more than 6 out of 10 respondents highlighted how legacy leads to a more complex IT landscape and to higher total costs of ownership for IT. Due to poor integration with other IT systems, banks can also take less advantage of external systems, data analyses and innovation technologies such as robotics. The evidence suggests that banks need to replace these systems with more modern, agile systems, then, if they are to get the most from their new technology.

While the need for upgrading is clear though, given the complexity of replacing legacy systems and the costs that are required for such a transformation, many directors remain reluctant when it comes to risking a redesign. Given the current circumstances and poor track record of digital change processes in the banking sector, this is somewhat understandable – but according to Eerdmans, firms can navigate this by following a “proven and pragmatic approach.”

Eerdmans argued, "Despite the challenges of legacy systems and the benefits of a modern core, banks are reluctant to transform because of the resources required and the risks associated with inefficient implementation… Even so, banks that are now investing in modernising their core technology will satisfy their customers while growing profitability.”

Platforms and open banking

Banks that are in a position to take a front-running role should consider transitioning into a platform-based model. These are models that integrate both sides of their stakeholders – customers and service partners – into a single approach, as opposed to the one-dimensional approach of incumbent retail banks to only provide customers with their own services.

Capgemini’s research suggests that embracing an “open banking” model is crucial for long-term success, including by stimulating innovation. It can meet the growing demand for cooperation sought by different aspects of the value chain.

“The Open X model helps banks to reduce operating costs and move from a high fixed investment in IT development to a more cost-effective and flexible cost model that integrates specialised players in the ecosystem,” concluded Eerdmans.