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Digital Transformation in Banking: Challenges & Trends

Last updated on
June 12, 2024


Digital transformation in banking - Key takeaways:

Digital transformation challenges in banking are: reluctance to use modern technologies, security obstacles, operating in organizational silos, neglecting technical debt.

Recommendations for banking are: digital account opening, using APIs, introducing digital payments, developing mobile banking, improving operational efficiency through digital transformation.

To accelerate digital transformation, financial institutions need to: hire or outsource highly skilled workforce, adapt highly strategic approach, leverage proper tools and methodologies.

Possible solutions: outsourcing / nearshoring to companies focused on swift delivery and experienced with digital transformation and legacy modernization topics.

Dive deeper into these topics by scrolling down to the full article.


Digital Transformation in Banking: Challenges & Trends

Digital transformation in banking: Challenges & trends

Digital transformation is spreading across all industries, including banking.

What are its specifics in this sector and why is it important to prioritize it? What are the main tools and approaches worth investing in? How to successfully execute digital transformation in banking industry? Let’s delve into the topic to explore what to do and avoid.

A successful digital transformation strategy is crucial for implementing the latest digital technologies, leveraging skilled IT professionals, and utilizing no code and low code platforms to remain competitive and drive business growth.

Banking industry vs digital transformation

Rapid changes in the banking and financial markets create numerous opportunities. However, failing to adapt to current market trends can lead to potential financial losses. Outdated, inefficient processes and systems, along with obsolete or incompatible infrastructure, result in decreased productivity, increased errors, and complications in integration and scalability. These issues are quite common in the banking industry. According to McKinsey research, large banks are 40% less productive than companies that are digital natives.

Additionally, more customers are moving to online and smartphone shopping. According to Statista, mobile e-commerce sales reached $2.2 trillion in 2023 and now make up 60% of the global e-commerce sales. Moreover, customers also expect higher levels of personalization and prefer banks that meet these demands.

Therefore, the financial sector must effectively respond to ongoing market changes while adapting to customers’ expectations. This means that developing a digital transformation strategy encompassing all aspects of a financial institution’s operations and customer trends is crucial to maintaining a competitive advantage.

What is digital transformation in banking?

Simply put, digital transformation involves modernizing a company’s infrastructure, processes, business models, and culture. This consists of integrating digital technologies and innovative strategies into a bank’s or financial institution’s operations. To name but a few benefits, such a transformation typically results in:

  • Improved overall efficiency
  • Enhanced customer engagement and experience
  • Driven innovation and adaptation to evolving markets
  • Improved security
  • Expanded the company’s offerings
  • Better business results
  • Easier customer acquisition and retention
  • Improved customer engagement and experience through data analytics.

What are digital transformation challenges in banking? 

Although digital transformation brings numerous benefits across industries, it sometimes fails in the banking sector. For instance, according to McKinsey research, 70% of digital transformations in banking exceed their original budgets, and 7% cost more than double the initial projection. Why does this happen?

Based on our experience and observation, the main digital transformation challenges in banking and reasons for the failure of such projects are:

Reluctance to use modern technologies

Generally speaking, it’s easy to stick to previous solutions and maintain the status quo. However, in the long term, this leads to significant slowdowns in business operations, accumulating bottlenecks, and limited business capabilities.

Not understanding customer expectations

Customer expectations evolve rapidly and indicate potential directions for change. Not researching and understanding these expectations is a critical mistake that limits growth and expansion opportunities.

Ignoring the growing use of digital channels 

Failing to provide customers with modern opportunities, expand digital channels, and invest in mobile banking hinders the transformation process.

Security obstacles

Large-scale transformations and significant advancements can encounter security challenges if not properly secured before starting the transformation. It is crucial to protect customer data and protect sensitive customer data by implementing robust security measures to guard against cyber threats.

Lack of impact measurement and tracking

Not measuring and tracking the impact of the transformation leads to unclear success metrics and missed opportunities for future improvements. Setting clear parameters to measure the impact on specific business areas is essential to get awareness of the transformation’s value and success.

Operating in organizational silos

Organizational silos slow down collaboration, create conflicting priorities, and result in a fragmented approach to execution.

Underestimating cost and complexity

Incorrect timing and budget assessments can lead to project cancellations or delays. This is common in banking, where projects often exceed timelines due to miscalculations.

Neglecting technical debt

The banking industry often has a significant amount of legacy systems and applications. Assessing the volume of technology debt is crucial for directing the transformation and increasing the chances of successful execution and impact.

Missing key talents

Banking organizations sometimes lack expertise in hiring tech talent and may not fully understand the current needs of the organization in light of digital transformation.

Recommendations on digital transformation in banking

How can you ensure a successful digital transformation? As industry experts, we offer the following tips and information on the latest trends that you can follow to make the process easier and less risky. Prioritizing customer satisfaction by leveraging customer data for personalized marketing campaigns, providing clear processes, and creating a cohesive digital customer journey is essential.

Apply modern technologies

Emerging technologies can significantly transform and improve your processes and infrastructure. Adopting them should be one of the fundamental steps in your digital transformation journey.

The most impactful technologies include:

  • Machine Learning (ML) and Artificial Intelligence (AI). These technologies assist in various ways, such as developing chatbots and online assistants, making predictions and analyzing data, and detecting fraud.
  • Robotic Process Automation (RPA). RPA helps automate standardized processes, lower operating costs, reduce manual effort, and ease your staff’s workload.
  • Cloud Computing. This technology enhances operations, improves productivity, and increases the security of services.
  • Blockchain increases transparency and secures transactions.

Digital account opening

As customers expect to do everything digitally, providing them with the opportunity to open accounts online increases their engagement and interest in your services. This makes it easier to acquire new customers and greatly improves their experience by offering convenience and reducing the time required to open an account. 

Additionally, digital account opening presents a great opportunity to offer additional products through a cross-sell model. It also minimizes employees’ workload since customers can complete the process themselves.

Using Application Programming Interfaces (APIs)

Utilizing APIs facilitates staying connected with customers and developing new products and services. APIs simplify the integration of applications with external or other systems, enhancing the intuitive use of the app. This enables the development of more innovative solutions and entry into new markets.

Introducing digital payments

Offering your customers digital payment systems, including mobile payments, online transactions, and digital wallets, is essential in the modern banking industry. This allows customers to execute transactions conveniently through mobile or online banking platforms.

Developing mobile banking

Mobile banking is a highly trending channel. According to Straits Research, the global mobile banking market was valued at USD 772.96 million in 2022 and is estimated to reach USD 2,092.36 million by 2031, growing at a CAGR of 11.70%. This means that neglecting this channel would be a strategic mistake. Allowing customers to access their bank via a mobile app is crucial and one of the main aspects of building their interest, engagement, satisfaction, and loyalty.

Application modernization

Fighting against legacy code is highly recommended. Even the most appealing features won't be successful with outdated, bugged infrastructure that can't integrate with newer solutions. Therefore, planning software modernization is crucial to addressing the issue of technical debt and conquering it successfully. 

To learn more about the benefits of software modernization, check out our report: 2024 State of Software Modernization. Check out also our blog post to learn more about major application modernization challenges.

Internet of Things (IoT)

Applying IoT solutions is the next modern way to improve banking. It enables the use of biometric sensors for process authorization, provides various location-based services, facilitates contactless payments, and more. IoT can offer a plethora of personalized solutions tailored to individual customer needs.

Introducing Big Data

Customer data has become the new foundation of operations for financial institutions through the use of Big Data. It enables the examination of various aspects of customer behavior and decisions, monitors expenditures, assesses risks, and much more. This technology is undoubtedly worth including in a digital transformation strategy.

Using video

As face-to-face interactions became limited during the COVID-19 pandemic and customers grew accustomed to contactless communication, including a video contact option could be a strategic step worth investing in.

How to accelerate digital transformation in the banking industry?

Accelerating digital transformation requires a strategic approach that leverages various tools and methodologies to drive organizational change and innovation. In our opinion, the strategy that has the biggest impact on expediting digital transformation in the banking industry is outsourcing.

Outsourcing your processes to countries with lower labor costs but higher expertise is an excellent way not only to reduce your overhead but also to improve the overall quality of operations and services. Poland is one of the top countries you can outsource to and offers several advantages that make it an attractive option for businesses worldwide. Here are some key benefits:

  • Highly skilled workforce. Poland boasts a strong pool of highly skilled IT professionals, including software developers, engineers, and project managers. Many of these professionals are well-educated and possess advanced degrees in their fields.
  • Strong IT infrastructure. Poland has made significant investments in its IT infrastructure, including high-speed internet connectivity and state-of-the-art technology parks. Moreover, the country has seen significant investments in the development of its innovation and startup market, supported both by government initiatives and independent investors.
  • Cost-effectiveness. Compared to Western European countries or the United States, labor costs in Poland are relatively lower. This makes outsourcing to Poland a cost-effective solution for companies looking to reduce their operational expenses without compromising on quality.
  • Cultural compatibility. Poland shares cultural similarities with many Western countries, making communication and collaboration easier for international clients. Additionally, proficiency in English is widespread among Polish professionals, further facilitating smooth interaction with clients from English-speaking countries.
  • A stable political and economic environment. As a European Union and NATO member, Poland provides a secure foundation for business operations.
  • Proximity to Western Europe. Poland's geographical location in Central Europe offers convenient access to Western European markets. This proximity reduces time zone differences and facilitates easier travel for on-site visits and meetings.

The benefits mentioned above contribute to a faster and optimized software delivery process, improved budget control, more efficient project scope management, and higher overall delivery quality.

How to start the digital transformation in the banking sector? 

If you're contemplating when to commence digital transformation, the answer is straightforward: the time is now. With evolving customer expectations and increasing demand, there's no time to spare.

If you need a reliable and experienced partner who can support you in digital transformation in banking industry, we’re here to help. Click here to check out some examples of successful digital transformation or search for top digital transformation companies right away.

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Olga Gierszal
IT Outsourcing Market Analyst & Software Engineering Editor

Software development enthusiast with 6 years of professional experience in the tech industry. Experienced in outsourcing and nearshoring market analysis. Our expert in presenting tech, business, and digital topics in an accessible way.

Leszek Knoll
CEO (Chief Engineering Officer)

With over 12 years of professional experience in the tech industry. Technology passionate, geek, and the co-founder of Brainhub. Combines his tech expertise with business knowledge.

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