As digital-native generations overtake the banking customer base, they naturally gravitate towards fintechs that mirror their digital-first preferences. 47% of all checking accounts opened in 2023 were opened with fintechs [1]. Still, traditional banking remains competitive in many areas, and adopting a digital banking strategy is the way to strengthen weaknesses, boost advantages, and win over customers.
What does it mean to go digital-native? There are two ways to approach financial software development: one is to develop a parallel version of existing services in digital—another is to start over digital first. For example, a bank may offer online account openings or transfers without optimizing these processes for the digital environment—that is a parallel service. The digital-first approach involves rethinking the whole system and maximizing the benefits that technology can offer. A truly effective digital strategy, one that achieves its goals and is sustainable in the long term, inherently includes adopting a digital-first methodology. Let’s understand the digital-first approach and explore how to build a digital strategy.
Why develop digital-native banking
Traditional banks can develop IT systems that are just as efficient as fintech’s. Chase and Goldman Sachs's Marcus are powereful examples of how traditional banks can leverage their strengths and invest in technology to offer services that merge the best of both worlds. Both institutions have successfully developed their technology platforms from the ground up, incorporating modern technological advancements.
There's a tangible and logical reason is holding traditional banks back in the digital realm: their history. To level the ground with fintechs, banks have to repay the technical debt. Technical debt accumulates when old, diverse systems, originally not designed to work together, must be continually patched to meet new needs. Such systems typically become inefficient, costly to maintain, and slow in adapting to new technologies or market demands. For example, a bank might run an old mainframe for core banking operations, several different CRM systems acquired through mergers, and standalone applications developed in-house for specific tasks.
Technical debt is a significant issue that requires a systematic and radical solution, which may involve either reworking or completely discarding large portions of a bank's IT system in a kind of creative destruction. These are the benefits of starting from scratch:
Robust security
Digital-native applications are typically more secure than systems composed of multiple disparate legacy systems. Just as a solid wall is more robust than one patched together from different materials. Today, developers employ a security-by-design approach, where security considerations are an integral part of the development process. This approach enables the creation of systems that can detect fraud, secure data, and respond promptly to emergencies.
Better security measures are also directly associated with customer trust. Customers are increasingly conscious of the security risks associated with sharing their personal data with financial institutions. 72% of customers feel comfortable with the security of their personal data if the application uses biometric authentication, and 82% are completely reassured by multi-factor authentication [2].
Cohesive data governance system
Starting with a clean slate allows organizations to design data structures, storage, and management practices that ensure high data quality, integrity, and security. Proper data governance addresses the industry's biggest challenges: over half of executives have faced problems during compliance audits, with 40% confessing to non-compliance because of poor data management at least once [3].
A unified data governance system reduces redundancies and eliminates inefficiencies that occur when disparate systems are patched together. It simplifies processes for data entry, retrieval, and management, which not only speeds up operations but also reduces costs associated with managing multiple legacy systems.
Read more: Data governance in banking and finance: a complete guide
Improved agility
Digital-first systems are built using modern architectural principles that imply modularity: individual components or services can be updated, added, or replaced without affecting the entire system. This is what allows these systems to be incredibly agile and adapt to changes in market demand, regulation, and technological landscape. With regulations on data privacy and usage continually evolving, having flexible and robust data governance makes processes easier to adapt to new laws and standards.
Modern development approaches prioritize customer experience, making interactions more intuitive, responsive, and personalized. This approach implies integrating user feedback into the development process for regular updates and improvements that directly tackle customer needs and problems.
Digital-first systems are also typically cloud-native, meaning they are built to operate in the cloud from the outset. This provides them with inherent scalability that is needed to handle fluctuating demand.
Benefiting from data
In a digital-first setting, data is automatically recorded and stored centralized in cloud or a data warehouse, enhancing data quality and accessibility. Companies can thus use machine learning, predictive analytics, and big data technologies for pattern recognition, trend prediction, and actionable insights. Digital-first services often provide real-time data analysis for immediate decision-making, which is crucial in rapidly changing environments, fraud detection, and crisis management.
In summary, strong security in digital applications reduces risks and increases customer trust. A unified data governance system ensures data quality, regulatory compliance, and reduces operational redundancy. The agility and scalability of modern cloud architectures allow for quick adaptation to market and regulatory changes, improving overall customer experience and operational efficiency. Now, how to achieve this?
Read more: Achieving digital transformation in banking one step at a time
Designing a digital banking strategy
Creating a digital banking transformation strategy requires a comprehensive plan for integrating digital technology into every aspect of a bank's operations. The overarching goal is to boost efficiency, improve customer experience, and enhance market competitiveness. The digital strategy essentially details how a bank can utilize modern technologies to modernize its services and operations. So here is a digital banking strategy roadmap:
Establish company-wide goals
The first step is to establish clear strategic goals for the entire organization. These goals should align with the broader vision of improving customer experience, increasing operational efficiency, and entering new markets. It's important to adjust performance metrics across the organization to prevent situations where branch employees are targeting obsolete KPIs or support teams are assigned to discarded systems.
Replace the old with the new
Existing systems should be assessed and categorized into those that can be updated and those requiring a complete overhaul. Addressing technical debt in a financial institution usually involves upgrading crucial systems, beginning with the core banking system, CRM, and cybersecurity measures. Additionally, data warehouses and analytics may need enhancements for efficient large-scale data management and advanced insights. A clear data governance structure should be established across all systems.
Expand the offering
A necessary part of a successful digital banking strategy is expanding services to match the newly acquired capabilities. This ensures that the bank remains competitive and relevant in the fast-evolving financial landscape.
For example, banks can analyze transactional data and browsing behaviors to personalize marketing efforts and recommend products. This data, if visualized and analyzed, can also help customers manage their finances by analyzing their spending habits and suggesting budgets. The majority of customers say that assistance in improving their financial health is extremely important for them [4]. Personal finance management is an example of a service that goes beyond core banking but has become commonplace. Providing this and other modern services can add significant value for the customer and improve trust and loyalty.
Read more: Digitalization in financial services: top tech and strategies
Monitor, evaluate, and iterate
Regular monitoring and evaluation of the digital banking strategy are crucial for assessing its effectiveness and making needed adjustments. Using metrics to evaluate the performance of digital services can help determine whether to expand, alter, or rebuild certain offerings. Banks should also regularly seek feedback from users to continually improve their digital services, ensuring they stay relevant and easy to use.
Partner with a technology outsourcing provider
Collaborating with technology outsourcing providers can accelerate the development of digital services by leveraging external expertise and technology solutions. Outsourcing companies can quickly assemble teams employing cutting-edge technologies and following the highest industry standards for application design, user experience, and security.
Why choose N-iX for digital banking consulting and implementation
N-iX is a trusted partner for many leading financial institutions worldwide, with over 10 years of experience in the financial services industry. We have successfully delivered over 250 finance projects and have more than 300 tech experts with financial services domain knowledge. We have a proven track record of helping banks, fintechs, and other financial institutions to boost performance, streamline processes, mitigate risks, and tackle regulatory hurdles.
Wrap up
The banking industry is shifting to digital-first strategies and modernizing outdated systems. At the core of this transition is not merely the adoption of new technologies but also an essential readiness to accept substantial changes. This preparedness involves a willingness to invest in advanced technologies, retrain employees, reconsider traditional banking models, and innovate customer interaction channels. Most importantly, it requires the willingness to discard old systems and start digital-first.
References
- The Checking Account War Is Over, Cornerstone Advisors
- Evolution of banking branches, BAI 2024
- Gartner peer community
- Consumers Expect Financial Advice: Banks Are Falling Short, The Financial Brand 2022
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