Significant investments are being made in US banking sector to transform the banking organization, at all levels of the business and technology infrastructures. Almost 80% of the US banking CEOs are planning to invest in digital transformation over the next three years.

Definition / Scope

Digital transformation means solving conventional challenges using digital solutions. Digital transformation uses digital technology into various areas of business, changing or improving how business is operated.

Digital transformation affects individuals, businesses, society and government. Technology plays a crucial role in any business to increase the value to customers. Hence, today, professionals and leaders should lead their organization through digital transformation.

Digital transformation in banking is more than just moving from traditional banking to the digital world. It is a major change in how banks and other financial institutions learn about, interact with and meet unsatisfied needs of customers.

Market Overview

According to the McKinsey Global Institutes Industry Digitization Index, US is operating at 18% of its digital potential. Banks in US have adopted new technologies to varying degrees. Most banks use elements of Cloud Computing, Process Automation, Artificial Intelligence, Machine Learning, etc. to digitalize their banking processes.

Significant investments are being made in the US banking sector to transform the banking organization, at all levels of the business and technology infrastructures. Business leaders and financial chiefs at banks are constantly looking at the factors that are driving digital transformation in order to keep pace with the leaders in the industry.

According to IDC Financial Insights, “There are very few banks in the United States that aren’t investing in transformational technologies, and fewer still that haven’t at least developed a digital transformation strategy. And the largest institutions are allocating more than 40% of their IT budgets to digital transformation.” Around 97% of the banks in US have undergone digital transformation or are currently undergoing.

Market Risks

Technological innovation is disrupting existing business models by intensifying competition, squeezing margins and changing the nature of customer interaction. As a result, those banks who are not embracing technological change will soon move out of the market.

Top Market Opportunities

The digital transformation is resulting in expanded financial inclusion, improved internal operations and transformations to the banking value chain.

• According to the Federal Deposit Insurance Corporation (FDIC) roughly 92 million people in the US are either under or unbanked due to their proximity to physical branch locations. Technological innovations can help banks to remove this barrier by reducing the complete reliance on brick-and-mortar channels by providing services via mobile channels.
• Banks can use Robotic process automation and analytics to streamline anti-money laundering, know your customer functions and integrate them more effectively within the broader risk management framework.
• Technology can help to bring transformation in the banking value chain. Banks can integrate non bank entities within their business to access new customers and markets. For example, certain banks are collaborating with non bank entities to leverage their lending platforms to process small business loan application more rapidly and efficiently.
• Banks can use technologies to create new and innovative products to satisfy unmet customers’ needs.
• Online banking is a great opportunity for banks in US. Reports show that 40% of Americans didn’t physically walk into banks or credit union for at least a 6 month period.

Market Trends

The two main drivers for digital transformation in banking in the US include meeting customer expectations and reducing operational costs.

Customer is the king in every business. Meeting their needs and expectation is paramount. The new digital technologies have caused a shift in customer expectations and habits.

The optionality, transparency, and affordability of products and services offered by prominent digital era companies have set a new baseline for banking customers’ expectations. Technologies allows customer to get what they want almost exactly at the moment they need it. Digital transformation allows opportunities for banks to meet these needs and expectations of customers.

Processes like faster on-boarding, electronic-Know your Customer, and moving infrastructure to cloud helps in reducing operating and fixed costs of banks. Cloud computing reduces the costs of rolling out and scaling the online and mobile banking capabilities. Big data analytics strengthens controls and reduces cost.

Robotics process automation can be programmed to do mundane, repetitive task, thousands of times faster and accurately than humans. Not only this, banks will be able to reach new levels of efficiency, accuracy, safety and security and adopt radical new approaches to the way product and services are constructed.

As digital capabilities mature, new technologies emerge and customer expectations continue to evolve. Hence, any banks adopting transformation must put continuous efforts to satisfy the needs of customers. Banks also need to extend their transformation efforts from digitizing narrowly targeted functions to the broader digitisation of the enterprise.

Also, implementing technological innovations always holds some elements of risk. It requires huge level of capital, liquidity and operational resilience, effective management, internal controls and restructuring of the business models and process.

Industry Challenges

Legacy systems, migration to the cloud, and ensuring security and privacy are some of the major challenges for banks undergoing digital transformation.

• Upgrading legacy system while running a business is extremely difficult to do and incurs high cost.
• Different generations want to handle their financial well-being differently. Some want to be able to meet with a person face-to-face while some would want to do everything virtually. Having a complete, omni-channel strategy is necessary to satisfy different customers and hence, is a great challenge for banks.
• Due to the virtual payments and omni-channel access, security risks are always there. The potential for cyber risk has also been increasing due to rapid adoption of new technologies.

Technology Trends

The main technological innovations that are driving change are as below:

Cloud computing: It helps IT resources to be centrally pooled and store, manage and process data on the Internet, rather than personal computers. It reduces the capital expense of buying hardware and software and makes data backup.

Big data and Analytics: Big data refers to the use of technologies to analyse large amount of data- structured and unstructured to find out the patterns, customer preferences, trends and correlation. New opportunities, revenues, better customer experience are some of the advantages of using big data analytics.

Artificial Intelligence: Artificial Intelligence is the creation of intelligent machines that seeks to emulate human traits like learning, understanding, working and reacting. AI is being used in financial industry, primarily in risk and compliance areas such as trade surveillance.

Robotic Process Automation: Robotic process automation is used to eliminate tedious tasks to free workers to focus on higher value work.

Distributed ledger technology: Distributed ledger technology, also known as “blockchain” technology is used in banks for a variety of use case, including master data management, collateral management, asset issuance and servicing and contract validation.

Internet of Things: Internet of things helps to collect data and share it across the web with people, applications and other devices. Within banks, IoT is still in its early stages, with adopters focusing on how to use it to augment financial services associated with other industries and apply it to digital product and service development.

Regulatory Trends

Regulators have provided banks with the flexibility to develop and deploy new technologies as long as proper controls and oversight are in place. Within the US, there are generally no formal legal or regulatory approval requirements that specifically apply to the technological innovation activities of banks, as long as these activities fall within the scope of the bank’s charter.

Depending upon the nature of the innovative activity, general aspects of the bank regulatory framework may apply, such as those pertaining to data security and privacy, AML/KYC and cyber security.

Market Size and Forecast

According to ZION market research report, global digital transformation market was valued at around USD 150.50 billion in 2015 and is expected to reach approximately USD 431.71 billion in 2021, growing at CAGR of slightly above 19.2% between 2016 and 2021. 

Gartner’s research shows the global banking industry will spend $519 billion on IT in 2018, up 4.1 percent over year from $499 in 2017.

Market share is clearly moving toward the large players, the top three or five, partly because they have invested in digital.

Market Outlook

Almost 80% of the US banking CEOs are planning to invest in digital transformation over the next three years. 

According to the IDC Financial Insights study, US Banking Digital Transformation Spending Forecast, 2017-2020, retail banks in the US will spend US$ 20.2 billion on hardware, software, services, and internal IT staff to develop and implement digital transformation initiatives in 2017, growing at an average compound annual growth rate (CAGR) of 22.5% into 2020. 

In North America, overall bank IT spending is projected to grow by 4.9 percent in 2018 to $104 billion.

Competitive Factors

Technology and innovation are the key factors for banks to compete in the market. Customers are likely to compare offerings of one bank with other banks. To be a market leader, banks need to take individual approaches to digital transformation.

In today’s scenario, differentiated and delightful customer experience has become more important than just providing financial services. To grab a bigger piece of the cake, banking industry has to understand the implicit needs of the customer.

Traditionally, banks spent most of their efforts, time and money on transaction execution, which is nothing but has become a very basic feature of their overall service. While providing convenient, consistent and detailed transaction processing ability is still critical, banks now need to reconsider the way customers are valued. For this, omni channel rather than multichannel can be successful strategy to increase the size of the share in the market.

Multichannel gives the flexibility to hop between channel, but not the continuation of the transactions among multiple channel. Whereas omni-channel strategy is based on a single brand name, providing customer centric experience to each and every customer as per their preference and expectations.

Key Market Players

JPMorgan, one of the largest banks has undertaken an aggressive digital transformation. JP Morgan spent 16 percent of its budget on technology last year. For JPMorgan the digital move have lowered the cost per check deposits by 94 percent, saved the company $365 million in costs through adoption of paperless statements.

Bank of America Merrill Lynch is in the middle of widespread digital transformation involving all aspects of its customer-facing operations. Professional at Bank of America Merrill Lynch has tripled its digital budget in 2016. The Bank of America is using AI that has been used to help customers manage their savings. It does this using AI, Predictive Analytics and Conversational Interfaces.

Citibank has acquired Feedzai, a Data Science Company that works in real time to identify and eliminate frauds.

Strategic Conclusion

Technological innovations hold much more potentials and opportunities for the banks.

• Technological innovations in the banks are transforming banks by creating new products and services for the consumers, meeting their implicit needs and reducing the operational cost.
• The new technologies and innovations are reshaping the bank business and operating models.
• It allows banks to strengthen customer engagement with personalized and innovative offerings.
• Banks will be able to reach new levels of efficiency, accuracy and safety.

References

1. https://www.mckinsey.com/industries/high-tech/our-insights/digital-america-a-tale-of-the-haves-and-have-mores
2. https://www.idc.com/getdoc.jsp?containerId=US42429417&showSite=mobile
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4. https://www.compucom.com/blog/top-4-digital-transformation-challenges-banks-face
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8. http://www.digitaljournal.com/tech-and-science/technology/bank-leaders-reveal-need-to-digitally-transform-their-business/article/504200
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11. https://www.simplilearn.com/digital-transformation-in-banking-article
12. https://www.informationweek.com/strategic-cio/executive-insights-and-innovation/bank-of-americas-digital-transformation-where-it-fits-in/a/d-id/1327293