New technologies, evolving consumer expectations, and other factors are pressing the entire banking industry to transform. Among the notable digital transformation examples in banking are mobile banking, automation, and implementation of artificial intelligence among others.
Digital transformation in banking has proven a bumpy path, especially for retail banks. Faced with the constantly evolving demands of the modern consumer and increasing disruption from rapidly emerging financial technologies (fintech), traditional banks are under more pressure than ever to adapt and innovate.
During the initial phase of the pandemic, the threat of recession and financial turmoil put pressure on certain banks and financial institutions to cut their budgets. However, banks are now on the recovery and have circled back to investing more in technology. In fact, JPMorgan Chase has announced their plan to increase its annual tech budget to $12 billion.
This investment is just as well since The New York Federal Reserve revealed financial firms face cyber attacks 300 times more than other industries. Moreover, the Anti-Phishing Working Group (APWG), for instance, revealed in their Q1 2022 report that the financial services industry saw a 35% increase in ransomware attacks, even as most sectors experienced decreased numbers.
“Threat actors are doubling down on social engineering.”
- VP of Cybersecurity, Fortune 100 Bank
Additionally, Millennials and Gen Z consumers are driving both digital banking challenges and opportunities for the banking sector. Recent statistics have shown that nearly 63% of US banking customers aged 15-24 years and more than 61% of those between 25-34 years old prefer mobile banking as their primary means to access bank services.
Combined, millennials and Gen Z now comprise the banking sector's most prominent consumer demographic. Mobile banking, in particular, ranks among the most pressing of all digital banking challenges and opportunities. This is one key area banks should prioritize in their digital transformation journey. Driven mainly by millennials and Gen Z consumers, mobile banking users in the US increased from 196.8 million in 2021 to 203 million in 2022.
The rise of neobanks and fintech companies challenge the dominance of traditional banking establishments. Catering mostly to younger consumer demographics who are more tech adept, neobanks also spur digital transformation in the banking sector.
With younger generations of banking consumers being digital natives, they expect banks to provide them with personalization, seamless omnichannel experience, and security. They also expect convenience and speed through technology. Therefore, digital transformation for banks becomes even more crucial if they want to capture, maintain and grow their hold of these emerging consumers.
These developments justify the urgent need for a digital transformation in banking practices and standards. That said, along with the proclaimed benefits of innovation comes a plethora of digital banking challenges, mainly on the security front but also on operational performance and consumer experience.
Banks not only have to reinvent and veer away from their old approach; they also have to invest in these disruptive technologies if they are to successfully navigate and capitalize on the different digital banking challenges and opportunities arising from these changes.
Solution: Learn more about security
and compliance for financial services.
#1. Securing Social Media Communications
One of the growing digital banking problems faced by industry players is the growing ubiquity of social media. Banks, like any other business, need to interact with their clients on their preferred platforms, which include social media. Considering the vast reach of social platforms like Facebook and Twitter, investments in these channels will only continue to grow.
However, utilizing social media to accelerate client communications presents a couple of the biggest digital banking challenges facing the banking industry ever – security and compliance. It’s also alarmingly easy for someone to post something that’s misguided at best or a regulatory violation at worst. Moreover, you can’t afford to leave your social channels open to malicious intrusions or staff negligence.
Securing social media channels should be a priority. All communications should go through a centralized monitoring system that automatically detects violations of corporate policy and mitigates them before they enter the wild. In an industry where trust is everything, the importance of implementing effective yet user-friendly controls over social communications cannot be overstated.
#2. Evolving Away from Legacy Applications
The lack of technological competence in many banks is alarming, and consumers want more than ever to enjoy an experience that traditional banking systems simply can’t offer. Many big banking systems, for example, are built using the COBOL programming language, which has been around for over 60 years! Moreover, a survey reveals that 58% of banks have legacy mainframes that are about 5-10 years old. 27% reported having 11-to-20-year-old mainframes, while 9% had legacy equipment aged 21-30 years old.
These legacy systems simply weren’t designed for today’s connected digital environment, making back-office technology in desperate need of a refresh. But digital transformation risks in banking also hound any initiative to move away from traditional banking infrastructure and applications.
The transition from dated and disparate legacy banking systems to a modern, digitally connected environment can be daunting. The shift will require a huge upfront investment for the necessary applications, custom processes, integrations with external systems, security, and maintenance. On top of that, people will have to be trained and constantly updated if you are to maximize your investment and derive great value from it.
And when you think about it, thanks to the availability of centralized platforms for monitoring security and compliance, newer technology is inherently safer and more in line with compliance requirements. This shows that you are heavily invested in your customers' data and privacy, bolstering their confidence in your organization.
#3. Solving Security Issues at Scale
Aside from securing social communication channels, the security of the IT infrastructure and all that data it contains remains to be one of the biggest digital transformation challenges faced by banks undergoing or considering digital transformation.
As banks go further in their digital transformation, their digital risk profile expands. Thus, it exposes banks to several threats and security issues in digital banking such as phishing, malware, ransomware, and data leaks.
There was a time when IT security was relatively easy. You’d simply install a firewall and be done with it. That’s certainly not true anymore. Some of the most notable instances in 2022 alone include:
- The Credit Suisse Data Leak – A German publication acquired the data of 18,000 Credit Suisse accounts, revealing that the Swiss company had “a number of high-profile criminals on their books.”
- Cash App Data Breach – 8.2 million of Cash App’s customers fell victim to a data breach, confirmed Cash App’s parent company, Block.
- Flagstar Bank Breach – This data breach affected 1.5 million customers of Flagstar. The company first noticed the breach in June 2022, although it is still unclear whether the data has been misused.
Nowadays, the typical banking environment has tens or even hundreds of thousands of networked computers and other connected devices in its portfolio. Add social, cloud, and mobile channels into the mix, and the potential attack surface expands exponentially. Furthermore, supply chain issues and cloud transformation change a lot about where the risk resides.
"The perimeter is wherever your data exists."
- VP of Cybersecurity, Fortune 100 Bank
How do you maintain security on such a massive scale?
The good news is that the digital transformation in banking also fuels the need for bespoke security and compliance solutions capable of scaling by demand. No matter how large a bank’s portfolio of digital assets is, there are now solutions that scale to practically any size, using automation and full cloud enablement to protect everything – from WhatsApp chats to status updates on Facebook. The scalability of SaaS solutions is exactly what makes them critically important in the retail banking sector.
#4. Breaking Down Silos and Mitigating Risks
Banks have long been siloed organizations. Different departments with their own goals using disparate systems. This inevitably leads to stunted growth, limited scalability, and decreased customer satisfaction. In fact, more traditional banks have built up an infamous reputation of giving customers a huge runaround whenever they apply for a new service or receive support.
The digital transformation in banking ushers in a unified platform that centralizes data and connects multiple systems and departments. It effectively eliminates the issues caused by silos. Remember that information silos can also pose risks to security and compliance since there’s a fundamental lack of cooperation and consistency in corporate policy-making. And now that marketing, for example, is the new frontline of brand defense, CMOs and CISOs should be working together to implement integrated solutions that work for everyone.
#5. Choosing Between Bricks-and-Mortar, Digital, or Both
Even with the advent and proliferation of digital technology, a significant number of clients still prefer to transact inside an actual bank. That is a fact. Players in the banking industry must see this as one of the persistent digital banking challenges and opportunities for the banking sector: to find that happy medium where they satisfy the needs of all their customers but still be able to achieve transformation.
Some customers like to check balances on their phones, but prefer to send payments from a desktop. Others prefer the convenience of applying for a loan using a quick online questionnaire. Still, customers still consider it important to have a local branch nearby.
Since everyone’s talking about digital transformation these days, there seems to be a misconception that bank branches are destined to go the way of the dinosaurs. This simply isn’t true, because many people still prefer face-to-face interactions when it comes to discussing important financial matters, like personal loans and mortgages. Digital tech isn’t meant to serve as a complete replacement for these traditional interactions – it’s meant to complement them.
There’s a number of reasons why banks need to go digital and innovate. Banks need to transform and embrace new and emerging technologies to compete, thrive, and move forward. As a matter of fact, successful financial institutions embrace digital transformation in an effort to gain more digital wallet share or to increase customer centricity. As a result, these banks are benefiting from the “security through transparency” that digital transformation enables for their end users and customers.
Overall, where most people see challenges, banks should see opportunities to provide better services and establish a great relationship with their customers. Because at the end of the day, that is what’s important - the customers’ satisfaction and trust.
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