Challenges On The Path To Achieving Impact

With consumers finding technology increasingly easy to access and deploy, businesses in all industries are using innovative thinking to redefine their models to address consumer expectations in terms of experience and fulfilment. In particular, more and more banks across the globe are adopting digital strategies to transform channels, products, processes and back-end systems. All are aimed at delivering a higher level of customer experience, remaining relevant in the market, appealing to new and emerging customer segments and lowering costs.

The race for digital banking is on and the region has seen a number of initiatives, with more to come in the very near future. They are primarily customer-centric and aim to address customer needs for a better experience. They also seek to improve financial performance by reducing operating costs, as well as acquiring customers from new segments—particularly the fast-growing millennial segment.  

With all the new digital strategies being rolled out, stakeholders across the value chain—whether they are customers, target segments, bank management or shareholders—are debating the relevance and impact of digitalisation. Is it necessary, and fully understood in the context of banking? Is the adopted approach towards it the right one? Will it achieve the desired objectives?  

While digitalisation has already impacted several other industries and drastically changed their business models, the banking sector is yet to experience substantial impact globally. This is particularly true of the Middle East. The sector has been amongst the slowest to react to digitalisation, largely due to regulatory “protection” against disruptors. This is somewhat perverse, given that technological disruption is actively encouraged by governments who place innovation at the heart of their growth and diversification strategies. However, with the extent of investment in new technologies, as well as the effort and focus of bank resources, there is a need to understand how and when the banking sector will realise the impact and potential of digitalisation.

In the context of the Middle East region, which has its own economic and demographic considerations, the impact and success of digitalisation can be measured from a few different perspectives. However, the approach taken towards digitalisation is important to determine its success. First and foremost, we must understand that digitalisation is neither a temporary fad nor a gimmick, nor is it a separate business line or just about front-end channels; it is the way to do business—a new model that is necessary for survival. Once this fundamental concept is understood, it will become clear to banks that they must adopt digital transformation journeys for their entire and existing business, rather than establish a new and separate stream.

Transforming to a digital business model is a challenging exercise that requires a long-term commitment to investing time and finances, as well as to changing the mind-set and culture. Consequently, while initial successes can likely be realised through a prioritisation process, our experience has shown that the full and true impact will take a minimum of three to five years on average.

Any digital transformation has to go hand-in-hand with that of IT, which means channels, middle-office and back-end infrastructure, as well as data analytics capabilities. For the transformation to be successful, front-end digital channels must offer the same experience as other channels; robust and extensive data analytics capabilities must be in place to determine which segments to target and with what products and services (whether from the existing suite or to be developed); and the capacity and capability of the bank’s IT infrastructure has to be enhanced in order to fulfil customer expectations in the speed and accuracy similar to that of requests initiated by customers.

As crucial as these elements are, many banks debate whether they should incur high capital expenditure on technology to lower operating costs. This is particularly disconcerting when considering legacy issues of IT infrastructure, for which the capital expenditure to transform technology can be prohibitive. In this regard, we have actually found that digitalisation can help achieve an improvement of around 40 per cent in EBITDA (Earnings before interest, tax, depreciation and amortisation), and that this is largely driven by cost reduction rather than revenue increase, despite capital expenditure incurred on IT.

Interestingly, when per-transaction costs are broken down by front-office, middle-office and back-office, some cost efficiencies can be achieved by just digitalising the front-end, so many initiatives focus on this. Whilst this is the easiest and quickest way to address market perception on digitalisation as well as cost reduction, it is neither sustainable nor does it improve the level of customer experience. For a truly sustainable digital proposition, customer fulfilment must be addressed, which is best done through investment in the back-end IT infrastructure.    

Depending on the size and business model complexity of the bank and the vintage of the IT infrastructure, the investment required to achieve foundational digital capability will vary; for mid-sized and developing markets’ banks, it is in the range of around $30-50 million over an average five-year period, while it is between $100-500 million for larger universal banks and those in developed markets. Some benefits begin to materialise in the first 12-18 months, but this has to be viewed as a medium-to-long term investment.

While the age and complexity of legacy IT infrastructures and architectures predominantly drive the investment value and complexity of digital transformations, we have found that these are just the obvious obstacles. A number of hidden issues create larger challenges and need to be addressed at the outset when setting a timeline and investment plan for the transformation roadmap.

From our experience in developing and implementing digital and IT transformation strategies, these typically include: a non-digital organisation structure that needs to be realigned for the digital business model; limited understanding of technology by business heads and other senior management including, in most cases, at board level; limited commitment from management and the board beyond the initial steps of such a programme; resistance to changing the culture of the bank, particularly in the decision-making process, to adopt any new business model created through digitalisation;  and probably the most underestimated, capacity constraints created through quality and quantity limitations in human capital.

It is never easy to implement transformation of any kind, considering the general resistance to change found in many organisations. Successful implementation of digital transformation requires banks to ensure a few key measures and disciplines are addressed as part of the digital transformation journey.

Firstly, they must set clear goals for digitalisation and understand why the bank needs to digitalise; a fundamental objective should be the need to remain relevant in response to fast-changing consumer demand. Additionally, banks should appoint a dedicated and specialist to lead the digital transformation, who must also be a member of the Executive Management, report directly to the CEO and be sufficiently empowered. Third, a joint decision-making body with senior cross-functional representation should also be formed and tasked with reviewing and approving initiatives necessary for digitalisation, and prioritising them to align with the digitalisation goals set by the bank. A Project Management (PMO) function for digitalisation is essential, and will ensure a PMO discipline is followed for onboarding new projects and monitoring progress and performance.

Moreover, cross-functional teams comprising experienced competent resources from strategic business units should work on the various initiatives identified for digitalisation, with someone appointed to lead each one. Simple and practical approaches are important for prioritised and phased selection and implementation, as is an IT roadmap that is aligned with the digital transformation roadmap (after gaps for the target operating model have been determined), with an investment plan and approved budget. Finally, the acquisition of new talent—while potentially challenging—is critically important; banks should re-evaluate how they are perceived by the millennial workforce to refresh their position as an employer-of-choice for this segment and to make the sector exciting and motivating enough for retention.

These are just some of the key elements to bear in mind for successful digital transformation. Ultimately, banks can be certain that they will realise the benefits that digital transformation can bring, so long as the objectives for digitalisation are clear and the unwavering management commitment is in place.