The history of the digitization in financial services can be traced back to the early 1970's. The first wave of digitization hit the American and European Union markets, with the tide gradually shifting to East Asian, Southeast Asian and South Asian countries. At the same time, the European banks adopted the SWIFT Model which enabled financial digital innovations and standards to control global interbank payments communication. This model rose so quickly to popularity in other countries, that it formed the basis of digital and mobile payment systems. Who would have imagined that transactions could be carried out at the tip of their fingertips?
It's been a good 53 years but how have banks fared in the digitization game so far? When 3000 executives from leading banking companies were interviewed by the World Economic Forum, they all agreed on one thing: If banks wanted to reap the full benefits of digitization, they must migrate to a banking cloud. While they pointed out banks' willingness to modernize their core processes, they did not want to move their core applications to the cloud at one go. Even though the pressure to stay relevant in this competitive landscape is at an all-time high, banks would prefer to play it safe. Instead, they would spend hundreds of dollars on buying or developing new innovations, rather than upgrading their existing systems. But where does this reluctance come from? Let us find out.
Skepticism around Modernization: Is it a Perception Issue or a Technical Roadblock?
Unlike any other industry, banks have been reluctant to change. A major part of this resistance is due to the presence of complex regulations and laws in the banking landscape. It's true that banks have been open to the idea of modernization and digital innovations, but the pace of adoption has been abysmally slow. Legacy systems are to be blamed for it. Core legacy applications have been redundant and obsolete (case in point the use of COBOL is still used by modern-day banks), not to mention the high maintenance costs associated with it. Despite knowing this, why are banks hesitant to modernize their on-prem systems?
Risks- that's what banking executives are majorly worried about. With large-scale legacy modernization, comes big security, compliance, and financial risks. Banks for the most part lack proper cloud risk management practices to execute risk-proof infra-modernization projects. At the same time, outsourcing this activity to any managed services partner comes with its fair share of budgetary constraints and uncertainties.
While their concerns are in the right place, what the majority of the banks don't realize is that time and opportunities wait for no one. From traditional brick-mortar-to net banking to mobile banking and now to P2P payments-banking has evolved and so have the preferences of the customers. Today's customers want to become more involved in the banking process than before. They are looking for a more holistic omnichannel experience to seek highly contextual and personalized financial offerings and products at every digital touchpoint. With the advent of digital-first neo banks and fintechs, traditional banks must act very fast to revamp their core if they want to still stay in the game. Offering unique, relevant, compliant-focused, customized services to customers is the best way to break the status quo.
The good news is that banks don't have to build anything from scratch. Instead, they can upgrade and digitize their existing systems on a banking cloud and leverage digital technologies smartly. Want to find out how digitization can bring a radical change in core banking? Keep reading.
What New Changes Will Digitization Bring to Banking?
AI Based Documentation Digitization
For banks that deal with huge volumes of paperwork, the OCR comes as a boon. Take for instance the convenience of customers. With OCR, they could easily deposit their cheques remotely. The app will take a high-resolution picture of the cheque and transfer it to the bank's database which will run its content through OCR software. Alternatively, the app can run the OCR through the chequeck and send the data to the bank. Likewise, banks can integrate OCR with ATMs to digitize sensitive information on the debit card and verify the details via a security system. For instance, banks in China have integrated OCR with facial recognition software that ensures double layers of security at the ATMs.
As mortgage loans and credit cards still rely on manual paperwork, OCR can help in document digitization. This assists bank employees in reviewing multiple documents at the same time. At the same time, computers can recognize new text arrangements as any changes in the paperwork format can be updated in the OCR software. When it comes to handling bank statements, OCR helps to review the documents without the need for the customers to visit the bank and authenticate each document. Another area where OCR can be useful is enabling risk management. Meaning, that when OCR is combined with other technologies like RPA and NLP, it helps in fraud detection and risk assessment while extracting data from physical documents.
Amalgamation of high-tech and high-touch experiences
How can retail banks decide to withstand the competition from other digital banks? By smartly leveraging the existing digital technologies that are known to revolutionize core banking services in the first place. In other words, a fierce push towards combining high-tech and high-touch experiences. Since customers are inclining more towards mobile-first experiences, banks can deploy enriching mobile innovations that will provide highly customized services aligned with customer expectations. Technological innovations from wearable smart devices to IoT not only offer customer access to banking services, they can reimagine ways in which banking professionals interact with their customers and amplify the speed of delivering services across brick-and-mortar branches. Meaning, from the time the customer steps in to the time they leave, banks can offer meaningful, relevant, personalized, and secured banking services at every step of the interaction. Furthermore, these technologies help banks optimize and streamline their banking operations without spending a hefty amount on pricey real estate innovation projects.
Adopting Zero Security Trust Model
By adopting the zero-trust model, the bank can fortify its security landscape and offer support initiatives that guarantee more flexibility and safety to its customers. Say for instance relationship managers and financial advisors have the freedom to meet their clients outside the bank premises. Their geographic flexibility is supported by analog tools like paper printouts or real-time data. Traditionally, financial advisors and relationship managers found it taxing to share real-time updates or collaborate with traders, not without the use of a VPN. However, with the zero-trust security model, a bank advisor can derive insights from real-time market data researchers, integrate it into their own business models and personalize the data for different customers whenever and wherever. What's more, zero trust security model can help in revamping and streamlining compliance policies for banks.
Reimagining banking apps to smart digital assistants
Sooner or later, banking apps will transition from self-service technologies to digital assistants. These digital assistants will predict the needs and preferences of the customers based on their real-time financial behavior and transactions. For instance, the customer transfers their month-end salary to their savings account but forgets to recharge their payment card with sufficient funds. The digital assistant will take note of this and adopt ways of sending proactive alerts to the customers before they even know about it.
Sustainability and Banking Digitalization Go Hand-in-hand
Everyone is aware of environmental sustainability. But what is digital sustainability? Simply put, it refers to integrating sustainability practices into a digital transformation initiative. With the entire world moving towards a paperless world, banks have kept up with this trend. The popular rise of e-documents is one such example. They can positively impact a bank's revenues. Banks can reduce huge expenses associated with purchasing paper documents, storage costs, and additional logistics like envelopes. Moreover, electronic documents save the time and effort involved in data entry.
With the availability of structured data, banks can make informed decisions based on customer insights, KYC, and budgeting. By moving operations to cloud services providers, banks can reduce the need for travel and paper-based transactions, positively impacting their green agendas. By migrating some key applications to the cloud, banks slowly relinquish their dependency on travel and paper-based transactions. On the other hand, open banking gives banks the opportunity to partner with big FinTechs to create a sustainable environment for their digital banking customers. For instance, integrating a carbon tracking feature in the app can help customers make sustainable choices for the environment.
Empowering Data Security and Privacy
With open banking being on the rise, customers are concerned with their data protection. But their fears are genuine. A study shows that 75 percent of cyberattacks in the banking industry target APIs. What banks need to do is develop a strong multilayered defense approach to their security. An easy way to do this is by implementing MFA best practices and techniques. To make it more effective, integrating AI and ML technologies can help in the continuous monitoring of payments via open banking APIs for any dubious transactions, anomalies, or discrepancies.
Advanced Blockchain for Seamless Verification Process
By modernizing background verification, blockchain technology can help to optimize the KYC registration process. It will collect and store data from multiple government and private data systems into a single secured database. Compared to the legacy verification process, deploying blockchain technologies to comply with KYC laws and verify customer information can be quicker, safer, and cost-effective.
Deployment of No-code/low-code Development Platforms
Banks that utilize legacy platforms incur high technology debt and slow down the application development process. By implementing low-code and no-code platforms, banks can tackle these challenges as they can integrate well-defined technologies and patterns suited for legacy systems. At the same, low-code platforms help to quickly launch applications and new product functionalities to meet the evolving market changes in the banking industry.
Can Risk-proof Transformations for Banks Be a Reality?
While banks adopt new digital technologies, enforcing a cloud risk management model is equally important to resolve the challenges that come with digital transformation. Not only that, the RBS model fosters an efficient governance culture that helps to address the risks associated with emerging technologies.
Optimizing risk management and compliance
Consider the scenario of non-performing loans. How can banks rise above this challenge? Ideally, they should establish risk backend profiles that will help them in submitting this granular data for regulations and compliance. In addition, banks can manage humungous volumes of data with standardization and low latency whilst ensuring data integrity. Meanwhile, embarking on digital innovation initiatives is an open invitation to complex financial frauds. Enabling AI-powered predictive modeling for fraud detection along with biometrics and pattern recognition techniques can identify banking risks. By automating KYC processes, customer's personally identifiable information (PII) can be protected against increasing security and financial risks.
Mitigating Risks with Precision
Banks should assess their business models and apply cloud risk management controls that align with the risk appetite of the bank. After this, the institution should monitor both existing and future risks to draft policies that will help in mitigating them. While making the policies, keep in mind to
- Determine accurate Standard Operating Procedures (SOPs) and fallback mechanisms.
- Define Service Level Agreements with well-defined roles and responsibilities
- Enable validation of risk reports within a specific time period
- Report anomalies detected during the review process
- Ensure transparency
Risk Data Models with Master Data Management (MDM)
For building holistic, uniform, and consistent references for minimizing risk latency, banks should include Developing comprehensive uniform, consistent and accountable references can reduce risk latency. This could include
- Risk monitoring and credit underwriting
- Mandatory risk-based supervision aligned with quantitative data
- Risk identification through related analytics
- Basel disclosures
Cultivate a Risk Management Culture Throughout
For banks to ensure continuous compliance, they should organize a data risk governance body that solely investigates the management, usage, and integration of high-risk data. Special data guidelines should be implemented for assigning access and ensuring data privacy. Banks should appoint data management officials to manage and monitor the overall process of regulatory compliance and data governance.
How Digital Technologies Can Empower Risk-Proof Business Transformations?
Robotic Process Automation (RPA): Along with managing the appraisal of loan applications, RPA helps to monitor risks and comply with regulations. It enables a fiduciary risk management process that involves scanning different emails, loan documents, and websites. At the same time, it helps banks to evaluate balance sheet ratios and report any anomalies.
Data Analytics: The application of data analytics tools reduces bank's exposure to credit risks while boosting profitability, creating meaningful customer experiences, connecting with new customers and churning out new products and services. Some data analytics tools also come with a credit analytic decision engine that facilitates the quick assessment of bank's overall risk frameworks.
Open-Source Analytics Tools: Open-source analytics tools help in detecting risks through fraud detection technologies, big data, and data analysis. Additionally, they also safeguard banks against the risks of data sourcing and compliance issues.
Accountability Platforms: The increase in independent risk management platforms like Operational Risk Management (ORM), MRM, Data Management and Controls enables banks to define their governance models and assign roles for managing risk management in banking.
Blockchain Technologies: Blockchain technology decentralizes ledger technology for data management. This helps banks comply with the latest regulations regarding data sharing. As a customer's personal information can be stored in decentralized blocks, their data is safeguarded against external threats and intrusions.
Cloud-Empowered, Digital-Enabled Transformations: How a Neo Bank Became a Leader in Customer Excellence
Mobile-first, fully secure, and quick banking - one of APAC's leading and popular neo banks is known for offering hyper-personalized, digitally enabled, inclusive financial services across 300000 customers. Though it ran its core banking infra on Google Cloud, it lacked the skillset to integrate AI, ML, and Analytics into the processes. As a result, the bank struggled to deliver customized speedy online banking services to its end customers.
How did the neo bank solve this issue? Seeking the guidance and expertise of a leading managed cloud services provider, the bank was able to deploy Google native intelligent analytics tools for specific use cases. The outcome? Better detection of fraudulent behavior and risk prediction. Followed by rapid delivery of personalized customer services based on consumer segments and behaviors.
Demystifying the Social Impact of Banking Digitization
Financial Inclusion & Equality: As part of the Sustainable Development Goals (SDGs), financial inclusion is defined as delivering affordable and accessible financial services to all socio-economic classes. Digitization helps banks to offer sustainable and inclusive financial solutions to the low-income groups of society. With technologies like big data, cloud computing, and artificial intelligence, banks can minimize information asymmetry, foster communication, enable data storage, and secure transmission. In China, banks powered by FinTech companies, have set up digital platforms to seamlessly connect with the underrepresented sections of their society and help their businesses raise funds.
Meanwhile, FinTechs are seen as a viable alternative to conventional banks that offer accessible micro-financial services to the unbanked populations. The launch of community banking hubs enables customers to access their money on specific days at specific venues. These banks support customers who don't know how or don't want to utilize digital services while offering digital offerings to their digital-savvy customers. This ensures that no one is deprived of the benefits offered by digital first banking experiences.
Averting Economic Crisis: As digital banking expands, this flourishing landscape will offer unique experiences to customers with minimal onboarding and help in deploying highly personalized innovations to meet the changing customer preferences. This push to digital banking will also support inclusivity and cost-efficiency for the underserved. This is because digitization will reduce costs by expanding economies of scale. It enhances the speed, security, and transparency of transactions whilst delivering financial products tailored to people with lower incomes. Making core financial services accessible like transaction accounts, credit, and insurance can make the poor more resilient and augment their incomes in times of inflation or economic uncertainties.
Green Banking: Combining Environmental, Social and Corporate Governance (ESG) into business strategies can make banking operations greener and sustainable. One of the ways to achieve this is through implementing digital technologies to streamline internal processes. By deploying technologies like intelligent automation, document digitization, and machine learning, banks can achieve cost savings, customer retention, and growth by driving digital sustainability initiatives.
Need Help in Spearheading Bank Transformation Journey? Get Connected with Cloud4C
When it comes to implementing digitization, banks have to consider two factors: technology utilized and social impact delivered. They should leverage digital technologies in such a way that they help in meeting core banking objectives and creating a positive change in society. But such an undertaking requires more than a solo effort; it demands the expertise of an experienced cloud managed services partner.
Cloud4C, one of the leading cloud-managed services, offers next-gen banking cloud and Bank-in-a-box solutions on our hybrid cloud to accelerate risk-proof bank transformations. Our Bank-in-a-Box solution suite is integrated with a Self-healing Operations Platform (SHOP), a mission-critical operations center supported by 25 Centers of Excellence that enables banking transformations effortlessly.
These cloud services help to build cloud frameworks aligned with the changing demands of security, compliance, availability, and flexibility. This, in turn, helps banks to launch new financial products and offerings to the market apart from delivering superior customer experiences and generating high ROIs.
Do you want to know more about our Bank-in-a-box solution suite? Get in touch with us today!