Are Banks Ready for the Process of Digitization?
Gregory, Robert Wayne; Ullings, Berno; Burger, André H.; Stieger, Jacqueline; Alessandrini, Isabel
Original document: Industrialized and Ready for Digital Transformation?
In the retail banking sector, change is afoot. This isn't happening in local bank branches, but on consumers' laptops, mobile phones and tablets.
A joint study from IESE Business School, led by Prof. Robert W. Gregory, and Synpulse Management Consulting surveys more than 100 executives in Spain to understand the state of digitization in banking. The results reveal that, by and large, banks are not yet ready for the digitization that is being demanded by customers and executives alike.
As financial technology ("FinTech") start-ups disrupt the industry and next-generation customers bring new expectations, Gregory and co-authors offer a framework to help banks assess their state of digital readiness.
Ready, Set, Digitize!
The study's survey of more than 100 senior bank executives covers approximately 40 percent of the population of Spanish banks -- including multinationals with Spanish offices.
A resounding 94 percent of those surveyed had embarked on some sort of process of digitization. About two-thirds (65 percent) were already in the implementation process, while 19 percent planned to execute in the present year (2015) and 10 percent planned to executive sometime between 2016 and 2018.
But there's a catch. Only 22 percent of executives surveyed replied that they were fully prepared for digitization. Another 50 percent replied that they were partially or had at least started preparing. The remaining 28 percent said they were still mostly or fully unprepared.
To better understand digital-readiness gaps in retail banking, survey questions homed in on the banks' back-end "industrialization" and front-end "digitization." Here, "industrialization" is defined as the groundwork needed to support the process of digitization, with efforts to standardize and automate operations to ensure cost-efficiency, reliability, specialization and speed in digital banking.
Four Digital-Readiness Gaps
The survey revealed great disparity between executives' perceptions of their banks' digital readiness and the reality of their operations. In fact, four key gaps prevailed in retail banking:
1. Heavy reliance on physical branch network. Executives still rely on physical branches as their top means to nurture customer relationships, the survey shows. And while customers, especially younger ones, seem to prefer banking anywhere, at any time, using any device, the transition to "omnichannel banking" has not yet occurred in most banks.
2. Legacy IT systems not fit for modern needs. Historically grown legacy IT architectures are too complex and lack the agility required for the process of digitization. While many banks have invested in a core banking platform, they tend to underperform the modern economy's digital platforms.
3. Workflow management has not gone far enough. Only 22 percent of executives surveyed consider their banking workflows (i.e., who does what and how) fully documented and defined. The rest have serious work to do to bridge this gap, with 31 percent claiming to be at the early stages in the process and another 11 percent still mostly or fully undocumented.
4. Too much focus on back-end functions. Banks must extend their digitization efforts to customer-facing, front-end services in order to preserve their most important relationships: with their customers. Indeed, improving customer relationships is identified as a reason for undergoing digitization by 95 percent surveyed.
Implications for Retail Banking Management
To close the digital-readiness gaps, banks need to further industrialize their back-end processes and digitize their front-end processes. Where to start? Many places at once, according to the study's authors. They lay out a framework dividing industrialization into three interrelated areas:
1. Processes and operations: driven by standardization and automation. The goals include lowering costs, reducing human errors, increasing speed and enabling straight-through processing.
2. Sourcing and governance: driven by centralization and specialization. The goals include efficiency gains via cross-unit synergies and outsourcing with increased control.
3. IT architecture: driven by optimization and complexity management. The goals include more reliability and responsiveness to new requirements, minimizing complexity.
With the data collected, the co-authors label the degree of readiness for each area, from 0 to 100 percent. In sum, banks are best prepared in the area of "sourcing and governance," with 68 percent readiness detected in the sample. "IT architecture" follows with 60 percent, trailed by "processes and operations" with just 58 percent.
The co-authors conclude: "banks still have a long way to go toward industrializing their back end to be able to meet the new set of expectations and demands associated with digital transformation." With customers demanding any-time/anyplace banking -- and with agile FinTech starts-ups entering the marketplace to meet new needs -- banks run the risk of being left behind.