DIgital is no longer a desire. It is an imperative. It's never too late to begin, but the sooner you do begin, the faster you'll reap the rewards.
The level of impact from the COVID-19 crisis is yet to be fully recognized, but as with other pivotal points in history, we are starting to see fundamental changes to the fabric of our society—and especially the workplace. Just like new security protocols at airports after 9/11 or the required SEC filings to protect the consumer after the Great Depression, COVID-19 will change the way all businesses operate.
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This is especially true for the banking industry, where COVID-19’s disruption has made modern banking technology to retain and engage customers an imperative. The disruption also highlighted opportunities for digitization and automation in operations. For example, a new SBA report shows that banks processed over 4.5 million Paycheck Protection Program (PPP) loans in only a few months - volumes that cannot be efficiently handled without automation.
It’s a safe bet that current changes to operations will continue well beyond the end of the pandemic, and banks will focus even more energy on “going digital” across all their functions. But carrying out digital transformation now and into the future comes with its own set of challenges for regional banks.
4 Digital Transformation Challenges for Regional Banks
Even before the COVID-19 pandemic, banks had their eyes on digital opportunities - but many regional banks have struggled to execute on those opportunities. Here are four common challenges faced by regional banks in their quest to go digital:
Knowing Where to Start — Regional banks don’t have the nearly unlimited funds of much larger banks to make investments in digital. Chase and Bank of America have collectively budgeted over $15 billion in 2020 for future technology investments, giving them the ability to make digital investments across the entire bank. Regional banking executives on the other hand face the challenge of choosing which aspects of digital strategy to target. Customer experience? Operations? Moving legacy infrastructure to the cloud?
Having the Right Talent — Last year after BB&T merged with SunTrust to become Truist, the bank selected Charlotte, N.C. as its new headquarters—not only for its location as a top banking hub but also for its access to a burgeoning tech community. In fact, the Charlotte Observer reported that a key reason for the merger was to “provide the new bank with greater scale to provide the digital services clients expect.”
Regional banks also need access to talented resources that have the skills required for a digital transformation, including analytics translators, data scientists, full-stack developers, agile coaches, and UX/UI designers. People with RPA, analytics, cloud computing, and design ability are all in high demand, and with the COVID-19 crisis, their demand is even higher.
Investing in the Right Technology —Bank of America’s Erica chatbot gained 1 million users in the months of March through May of this year, bringing Erica’s total users to 14 million. Although the chatbot had only been in production since June 2018, the investment totaled millions of dollars and thousands of research hours with SRI international. But such an investment is out of reach for most regional banks.
Smaller firms need to prioritize which aspects of digitization and automation to invest in. But prioritizing is extremely challenging with so many out-of-the-box tools to consider, compounded by resources constraints due to the need to simply keep current operations going on decades-old back-end systems and databases.
Implementing It All — Even for those regional banks that address these first three challenges, they still have to take on the challenge of implementing successfully.
American Banker reported that “Goldman Sachs CEO Lloyd Blankfein calls the investment bank a tech company — and roughly 25% of its 33,000 employees are engineers.” The publication also reported that “industry observers now predict that within a decade, the biggest bank will be a technology firm.” Regional banks will need to start adopting new operating models to implement technologies, as well as promote a culture to foster innovation.
Strategic Moves to Accelerate Digital Transformation Without Breaking the Bank
Regional banks can undertake several strategies to successfully accelerate the process. These include identifying key value drivers, building the ability to deliver capabilities, taking an integrated approach to program design, using Agile techniques to execute, and paying attention to governance.
Regional banks are just that--regional--and they should play to that strength of being the local banking institution with the best ability to make that true relationship with the customer. This starts with breaking down the walls and adopting the digital technologies that provide your customer a better user experience. This enables employees to focus more time on the customer’s critical needs and build that emotional connection versus a transactional one.
Move 1: Identify Key Value Drivers
Let’s start with value first. Typically, during technology initiatives, companies calculate ROI with the assumption that business will stay constant. With COVID-19, however, companies have learned that’s simply not the case. By not going digital, it’s not just a matter of ROI. Rather, it’s a matter of the potential number of customers you could lose by not having digital capabilities - an opportunity cost KPI that many banking executives don’t like to talk about.
We recommend asking questions like, “How much of my customer or employee base will I lose by continuing to use slow, manual, paper-based processes? What are the key technologies that will enable my key drivers of value creation?”
Since regional banks can’t provide the latest high-tech advances to everyone, they should focus on the customer community that is driving the value at the bank. A community is not a geographical area but rather a group of customers within the bank. For example, regional banks are often tied to local industries like manufacturing, pharmaceutical, agricultural, construction, and energy, thus resulting in specific needs of that community and the customers within it.
Identifying your specific needs will provide you with the data points for your technology investments.
Move 2: Build the Ability to Deliver New Capabilities
As mentioned, regional banks are at a significant disadvantage due to a lack of employees with digital transformation capabilities. JPMorgan Chase, for example, has a team of 40,000 technologists, including 18,000 developers “creating intellectual property,” according to the firm. It has a $9 billion technology budget, about a third of which is spent on investments.
One way for regional banks to address this disadvantage is to aggressively re-allocate and train existing staff, while also recruiting new talent with the right skills for digital transformation - aligning their talent strategies with business strategies and encouraging professional development. Another way is to tap into a partner ecosystem to ramp up resources and expertise quickly and on-demand, rather than hiring thousands of engineers.
Doing both of these things - and quickly - is actually easier now. With resources, COVID-19 has reinforced the feasibility of effective remote work for employees, contractors, and vendors - and allows a bank to tap into a much broader talent pool than just a local one. With partnerships, some banks are getting creative. For example, in November 2019 Citigroup announced that they would partner with a local credit union and Google to offer clients access to their bank accounts through Google’s Cache financial product.
The decision whether to partner, or to do it yourself, is a critical investment decision. This has spurred some regional banks to simply partner with FinTech companies instead of developing new technologies in-house.
Move 3: Take an Integrated Approach to Program Design
Many organizations are running three simultaneous transformations. First, they’re reimagining their customer experience. Second, they’re automating their operations. Third, they’re migrating to the cloud. Without an integrated approach, such companies are creating silos with their organization and hindering the success of their digital transformation endeavors overall. Instead, companies should be looking at the end-to-end value stream of a journey to avoid departmentalization.
Solving this problem starts with strong internal communications that translates to all employees receiving relevant information and keeping them connected to company-wide business goals by leadership.
Social Chorus, a platform for workforce communications, writes, “If a majority of employees feel disconnected from the business and don’t understand why decisions are being made, the organization’s program is likely to fail.” This includes digital transformation, where departments like HR and Internal Communications can help to promote transformation across silos. More employees involved in the process and rooting for the initiative’s success will be a key driver of working across departments.
Move 4: Execute With an Agile Approach
Being smaller than the big banks, regional banks are in a position to be more nimble and change faster. This advantage is magnified when adopting the Agile methodology, which increases the effectiveness and efficiency in delivering high impact initiatives that allow them to connect with customers the most. While Agile was originally used to develop software, more industries are adopting more broadly in order to respond to the demands of continuous change.
A good example of the impact of Agile is Quicken Loans. Quicken grew from a small loan originator to launching a new product called Rocket Mortgage, and the company is set for an IPO this year. Quicken Loans’ CEO Jay Farner credits the Agile approach for its success. “Our Technology team understands that to be among the best of the best, we must remain nimble, agile and obsessed with finding a better way,” he said.
Regional banks have failed to move quickly with easy wins to improve the customer experience. This can be seen simply by looking at their websites and online self-service capabilities.
For example, removing a co-owner’s name from an account due to a death is often a time-consuming process which requires downloading forms from the website and handwriting information, thus leaving the customer who is already having a difficult emotional time with a negative experience. An agile organization would be able to quickly identify the manual forms, digitize them, and increase the throughput time of the transaction.
Move 5: Build Governance Into Your Digital Transformation
Digital transformation will be an investment requiring not only organization-wide accountability, but also long-term discipline. A governance model will enable consistent decision-making focused on monitoring key value drivers, providing transparency, and managing risks. Regional banks will have a tremendous amount of digital investments to make, and ensuring there is a proper governance model in place to make those decisions and track them is critical.
In particular, regional banks need a governance model to:
- Provide the C-suite with transparency on costs, investment returns, and available resources.
- Maintain a continuously updated baseline of investment decisions, initiatives in execution, and scoring.
- Have a methodology that enables reliable and value-focused decisions.
While the COVID-19 pandemic demonstrated a need for banks to adopt new, digital ways of business, digital transformation was already well established on the industry’s radar. The pandemic simply moved digital transformation from priority to critical status for regional banks.
Despite challenges like finding the right technology, talent, and partners, strategic moves like the ones detailed in this white paper can help regional banks accelerate their digital transformation journeys.