The COVID pandemic of the last couple of years significantly accelerated the pace of digital transformation in many sectors of the economy and society. Nowhere was this more apparent than in the banking sector. According to McKinsey1, banking is now the most digital industry with a 77 percent adoption rate among European consumers. Twenty-three percent of customers moved to digital banking during the past two years of COVID. Unlike some other sectors, this shift appears to be permanent – the same McKinsey research suggests that 82% of digital customers intend to continue using digital channels.
Consolidate or Expand?
The question banks face in 2023 is how do they capitalise on this opportunity? Faced with the headwinds of cost of living, inflation and energy crises, the temptation is to ‘bank’ gains, ‘batten down the hatches’ and ride out the storm. Many could be forgiven for pausing digital transformation to concentrate on cutting costs and prepare for the inevitable increase in defaults and other financial stresses from customers in retail and commercial banking.
Yet to do so would miss a significant opportunity to further extend progress on digital transformation. Those that embrace the opportunity will find that it delivers not only new differentiation and better cost-income ratios but potentially completely new, exciting, and mutually beneficial relationships with customers.
2023 should be the year when banks accelerate from basic automated transactional digital banking, where competitive advantage is hard to defend, to advisory-/needs-based selling. Using advanced analytics to advise customers in uncertain times will open up competitive advantages in a market congested with new niche players and blurred boundaries.
A return to rising interest rates could strengthen balance sheets that bolster the bank’s traditional core operating model. Gartner predicts that IT budgets will rise 2.3% in 2023 in all sectors across EMEA.2 Banks will need to prioritise investments in those areas that deliver the greatest return.
Whereas digital transformation has primarily (and correctly) focused on creating new digital touchpoints for customers, now is the time to invest in the middle and back-office systems that will deliver urgent cost savings and lay the foundations of new sources of differentiation and value to customers.
Data Analytics Powering Three Shifts
This year leading banks will make three shifts to extend their digital transformations. From automation to reinvention, segmentation to granularity, and experimentation to trusted deployment at scale. Each focus on understanding customers’ needs via granular data and are not only for external customer-facing applications but also for bank-internal applications supporting staff in customer interactions.
Better analytics, at a more granular and personal level, will help manage increasing risks and provide insights that can lower costs while simultaneously improving the quality of customer experience. But currently, unnecessary data movement, replication, and the creation of multiple functional views of the same data all create inefficiencies, cost and data governance issues. The ability to move query processing to the data instead is essential to enable these shifts.
From Automation to Reinvention
The rapid digitalisation of banking in the last few years has seen new digital channels and touchpoints offered to customers unable to visit branches to make transactions due to COVID. However, it has delivered only the first element of digital transformation. Processes have been digitised, but few have been transformed. To some extent, the easy stuff has been done. The relatively low-hanging fruit of front-office integration has been harvested.
It is no longer enough to automate existing processes to squeeze operational costs and create better flexibility, resilience, and quality of service. Now data analytics must drive new approaches and opportunities to understand the performance of products, segments, and individual customers to offer tailored, profitable services while avoiding exposure to increasing default rates. With granular data the best banks will offer asset-liability management services that link relevant sensitivity tests as well as what-if scenarios for short and long-term risks at household or individual customer level.
Automating processes and creating data platforms that promote the use and reuse of consolidated data to drive analytics is an essential first step in digital transformation. But using technology to ‘do things right’ is very different from deploying enterprise-wide analytics that helps the bank ‘do the right things!’
To date, digital transformation has focused on systems of engagement which have smoothed well- established customer journeys. Leading banks focused on true transformation are now leveraging the extensive and powerful ‘systems of intelligence’ that orchestrate huge data to deliver customer- centric insights that highlight entirely new journeys that create differentiation, optimize cost and deliver value. In 2023 investments focused on leveraging systems of intelligence such as Teradata will drive a new wave of digital transformation.
From Segmentation to Granularity
Knowing which things are the right things to do is the essence of good management – and it is hard at the best of times! The volatility of today’s economic environment significantly ratchets up the difficulty and the risk of getting things wrong. Broad generalisations and decisions based on old data or previous experience will not cut it in today’s environment. The intricacies and interrelatedness of today’s challenges mean that every customer’s unique set of circumstances matters. To deliver the next wave of personalisation and spot and mitigate new risks, banks need to significantly enhance the granularity of the data driving their analytical models.
Legacy segmentations, cohort-based decisions, and risk profiles are now too blunt to be useful. Banks need the capability to analyse and make decisions about every individual customer based on personalised data and individualised forecasts. That will require massive analytics capabilities. And it will need to be done in near real-time as a volatile market, and economic environments shift constantly.
From Experimentation to Guaranteed Deployment
Delivering this granularity at the scale and speed needed to deliver to customers, regulators, and investors requires faultless deployment. The time for piecemeal experimentation has gone. Small departmental or product line analytics designed to support a single touchpoint may have catalysed innovation in pockets, but today’s world needs innovation combined with almost zero delivery risk.
As focus shifts from experimentation at the bleeding edge to sustainable improvement of core processes, some challenger banks may struggle. They simply lack the resources to deliver wholesale digital transformation at scale. Trusted ‘systems of intelligence’ must be reliable, cost-effective, and fast at scale. Processing thousands of data points on potentially millions of individual customers to identify opportunities and mitigate risk is not something to trust to just anyone.
As an organisation that has worked with banks for decades and helped them weather previous storms, from the 2008 financial crisis to the more recent COVID pandemic, Teradata has proven itself as a reliable partner. Cloud-native data fabrics move analytics to the data whilst preserving their integrity, governance, and security. They leverage existing investments to deliver granular, real- time data analytics at a predictable cost and with little or no deployment risk.
2023, for all its challenges, presents the opportunity to accelerate the transformative power of digital and data analytics. Renewed focus on driving ROI from systems of intelligence will secure advances already made and catalyse the next wave of change that reasserts banks as trusted advisors at the centre of customers’ financial lives.
About Anders Dalgaard
Anders Dalgaard is an Analytics Practice Partner – Business Development at Teradata. Anders has over 16 years’ experience in business development across various industries, including Banking. Anders is an Executive MBA student at the Technical University of Denmark (DTU) and has a Graduate Diploma in Business Administration (Technology & Management Accounting) from Copenhagen Business School.
About Rajesh Deodhar
Rajesh Deodhar is an Industry Partner- Financial Services at Teradata. Rajesh has over 25 years’ experience in helping banks and financial services firms apply digital technologies and data/ analytics, to address business challenges in the areas of Customer Strategy, Customer Experience, Financial Crime and Climate Change. Rajesh has an MBA from London Business School and a Bachelor’s degree in Statistics.