Business Transformation in the banking industry, a literature review

1. Introduction

Digital transformation is a concept that an organisation undertakes when to changes to new ways of working and thinking by using digital, social, mobile, and new technologies (Diener & Špaček, 2021). This literature report will present and discuss the central motivation and challenges toward Digital Transformation in the banking industry. While there was a massive disruption in the status quo throughout the last decade, this paper will identify and discuss the roles of banks, FinTechs, Technology, Customers, Regulations and their influence. It includes the impact of technology on financial services, the rise of FinTechs and how these startups applied the latest technologies alongside customer-centric business models to disrupt the industry. Also, the contrast of Fintechs challenging the status quo with innovation and banking approaching new technologies to develop digital services while reshaping processes towards innovation. This paper also presents cutting-edge technologies, like cloud computing, Artificial-Intelligence (AI) and blockchain, and how these apply to new services. In parallel, along with new services, how it enhances Customer Experience and the current expectation from customers towards all these new technologies. Also, the challenges the banking industry currently tackles to engage customers. Notwithstanding the critical role of regulations through the development of the sector and in what circumstances do banks stop seeing FinTechs as threats and develop a highly collaborative business environment that could benefit both.

2. Research Method

3. The Report /

3.1 Summary table

3.2 Central ideas and debates

These articles discuss various perspectives of Digital Transformation in the banking industry as a global trend from a very current perspective. While it is a cross-demographic and not an isolated movement, not restricted to a particular country, culture, or continent, these articles approach banks from England, European Union, the Middle East, Africa, and Asia from 2019 to 2021.

Nowadays, most banks have a primary mission of upgrading outdated systems towards transitioning to the edge of technology while updating their business models. However, in parallel, the advance of FinTechs was the central motivation of banks’ Digital Transformation, aiming to embrace innovation. There is a shared vision among authors that FinTechs are innovative startups using the latest Technologies in the Financial Industry. For example, in London (El-Gohary et al., 2021), a Neobank is built on top of cutting-edge technologies with the concept of providing “excellence in customer experience” embedded into their business models. As a result, banks have started approaching more digital channels to enhance customer communication, resulting in customer satisfaction towards loyalty (Rubaci & Akgül, 2019). Likewise, Iranian (Naimi-Sadigh et al., 2021) and Hungarian (Diener & Špaček, 2021) banks adopt digital technologies to simplify and optimise operations with customers and partners, including enhancing management capability and attracting skilled professionals.

By using big data and AI technologies, Omni-channel will offer real-time tools (like data analytics) to enhance interaction, solve demands, and personalised communication while elevating customer loyalty towards advocacy.

About the FinTechs, authors share the opinion about banks initially seeing them as a threat by having innovation capacity towards CX, but foremost because they were significantly scaling market share. For example, in Russia, banks lost many customers to FinTechs because they offer more convenience to customers (Galazova & Magomaeva, 2019). For example, mobile applications with chatbots, big data, and AI enhance CX. In contrast, rather than fighting back, the bank industry understood that developing a collaborative business environment would provide resources to upskill product development capabilities. For example, Tunisian banks approached FinTechs by developing partnerships and creating an incubation environment (Khanchel, 2019).

Also, due to having insights towards updating business models from product-centric to customer-centric (Diener & Špaček, 2021), banks would stay in a sustainable position in the industry in the long term.

For example, nowadays, competitiveness in Ukraine is tightly related to Digital Transformation, which implicates updating the business strategy within digital capabilities. Consequently, banks improve customer service and create innovative products to enhance profitability.

The process happens mostly by implementing as many digital channels for customers as possible, like online & mobile banking. For example, banks create various revenue streams that result in customer loyalty by facilitating customer communication while amplifying digital channels. Today, top Ukrainian banks are the most digital ones. At the same time, those remaining more traditional are the minority and the less profitable. The primary revenue channels for income are assets, volumes of deposits and loans for the most digitalised banks (Kolodiziev et al., 2021).

While FinTechs influence banks towards turning into innovative and customer-centric organisations, they also push banks to the edge of technology. In contrast, banks are historically early adopters of new technologies. As an advantage, they are used to dealing with this challenge and providing solutions to its adoption (Naimi-Sadigh et al., 2021). Therefore, innovation and digitalisation happen in Russia and Hungary by embedding new technologies, for example:

·         Blockchain generates smart contracts, performs risk management for loans, enhances security, and creates innovative financial services.

·         Cloud computing supports numerous applications while optimising processes.

·         Open banking applications are also a milestone in the banking industry by offering competitive advantages through a decentralised product strategy.

·         Big Data supports IA services and has elevated the CX standards in banking to the next level (Khanchel, 2019).

·         Virtual agents (chatbots) substitute interaction efficiently with bank employees, sparing customers to visit bank branches.

Banks’ Digital Transformation focus on optimising processes addressing the whole value chain: customers, employees, & stakeholders. In parallel, FinTechs show value as a set of intangible services, which impacts banks’ digitalisation approaching digital products addressing specific needs and product distribution—also, the product development through a collaborative and interactive to optimise outcomes. Furthermore, banks acknowledge that mobile applications and online services are the primary requirements to enhance value by providing convenient customer solutions (Naimi-Sadigh et al., 2021).

In Hungary, the Design Thinking Framework demonstrates a highly efficient approach to improving customer service for developing products with specific needs. It defines “personas” and “customer journeys”, which collaboratively guide the development of innovation and new products. FinTechs collaborate with banks by offering quick integration to third-party services for distributing products. It adds significant value by minimising friction points between businesses and customers, improving quality, and saving costs while operating digitally (Feher & Varga, 2019).

Although digital banking offers numerous advantages, banks also deal with challenges. For example, in Italy, the lack of knowledge to operate devices prevents customers from adhering to new technologies and security concerns. Furthermore, the lack of emotional connections from digital interfaces impacts customer retention and loyalty while preventing customers from maintaining a single digital-based service provider or a traditional one (Filotto et al., 2021). It happens even acknowledging digital services as quality and cost-effective. Meanwhile, in Spain, banks struggle to understand customer behaviour. They find out that the number of online people is evolving at a minor pace compared to online purchases, which implicates more financial & digital awareness and education to fasten digital development. As a result, branches will decrease but shall increase quality by focusing on customer advice while online services grow (Valero et al., 2020).

While banks move slowly due to their complex structures, which implies high development costs and a high risk of losing the time frame for launching new products. In contrast, big tech companies like Google, Apple, and Amazon (see figure 01) represent a genuine threat to banks due to:

Alongside banks’ Digital Transformation, the regulatory sector plays a vital role. In one way, regulation enables banks to apply new technologies to remain contemporary globally and compete locally and in the FinTech sector (Galazova & Magomaeva, 2019). In contrast, it also imposes restrictions to digitalisation evolve. For example, while the RegTech sector arises, it moves slowly in Russia. As a result, banks lost a significant market share to FinTechs before starting digital embedding strategies. Similarly, the European Union updates regulations to facilitate new players in the industry while stimulating cooperation. As a result, banks adapted and started providing white-label products and did not compete while transitioning to infra-structure providers (Feher & Varga, 2019).

3.3 Debating central ideas

There are numerous discussions through the findings of the literature review. Primarily, the most significant is the influence of the FinTechs on banking and how both managed to evolve through a collaborative business environment. Whist banks historically used to hold a comfortable position in the financial industry due to lacking competition, the rise of FinTechs moved banks out of their comfort zone. Nowadays, these startups are still their driving force, pushing banks towards pursuing innovation and reshaping business models while digitalising strategies.

Notwithstanding, nowadays, digitalisation is directly associated with profitability. It happens because the most digitalised banks are more efficient in generating revenues and maintaining customers towards loyalty and advocacy (Rubaci & Akgül, 2019). In contrast, the opposite occurs with the lesser digitalised, with less income and fewer digital-based customers.

However, although this literature review is about Digital Transformation in the banking industry, it is impossible not to highlight the impact of FinTechs, because:

From the customer perspective, FinTechs also set new standards in the industry. While FinTechs successfully scaled market share, they also transitioned the customer mindset to expect outstanding CX in customer-centric products from financial service providers. CX is a critical success factor in the banking industry (El-Gohary et al., 2021). As a result, it is mandatory to reshape business models from product-centric to customer-centric, alongside the whole value chain to define, develop and distribute new products.

Furthermore, accordingly to examples of Iran and Ukraine, the success of digitalisation depends on the technology landscape. Whist new technologies have already taken a solid position in the industry; others are taking place.

Today, a customer-oriented strategy must focus on holistic experiences. Through Omni-channel, customers can quickly get support from multiple sources. Then, from the users’ perspective, the best technology is mobile by providing more convenience, while AI plays a significant role (see figure 01). In parallel, cloud computing, mobile, and AI technologies are the most relevant for banks. Moreover, Other technologies, like Blockchain, Virtual&Augmented reality, Big Data, and IoT, also allow banks to present relevant interactions, especially by connecting existing services with new digital capabilities. Therefore, these technologies play a pillar role in Digital Transformation in the banking industry by enabling innovation.

Figure 01: Comparative chart of strategies by criteria. Source (Naimi-Sadigh et al., 2021).

Firstly, as a transformational gap, Big Techs are a threat because these organisations have top-notch technologies while knowing how to apply them to provide fantastic CX. For example, Google and Apple currently have banking products: Apple Pay and Google Pay. Furthermore, these Tech Giants know how to attract digital-based customers, along with the advantage of having robust financial support from revenue (see figure 02).

Figure 02: Big Techs 2021 (Ali, 2021)

Secondly, the regulatory sector also plays a crucial role throughout the Digital Transformation process because organisations rely on regulations constraints to adjust their business models and develop innovative products while implementing digital strategies. As a result, it can significantly elevate the businesses performance. For instance, in Russia, the regulatory sector moved slowly, which benefited the rise of FinTechs, allowing them to grow their market share (Galazova & Magomaeva, 2019). In contrast, it jeopardised banks, losing significant market share while regulations constraints prevented product strategy adjustments toward digital trends.

Thirdly and finally, culture and education also cause a significant impact on the overall Digital Transformation performance once it encourages or prevents customers from adhering to cutting-edge technologies. For instance, although the latest technologies are available for financial services in Italy, most customers still prefer to go to bank branches to access services. For many reasons, customers are used to in-person while complaining that digital services lack emotional connection to customers and security concerns (Filotto et al., 2021). In addition, the older generation struggles to operate digital devices. Due to security concerns, there is a lack of customer confidence in Spain, feel more confident with in-person services, which implicates a slow transition from offline to online services (Valero et al., 2020). So then, banks turned branches into “advice centres” to secure customer loyalty while shifting used to digital services. In conclusion, reliability is crucial to customer confidence in digital services, which may define the success or failure of banking Digital Transformation.

4. Conclusion & Recommendation

Digital Transformation in the banking industry is a massive global disruption, a paradigm change, an ongoing process without turning back. Players in the bank industry will thrive in the long term only if promoting a digitalisation process in the organisation’s core. Nowadays, the result of FinTechs challenging the status quo is enormous, setting banking services towards new technologies to develop digital services while reshaping business models towards innovation. For example, banks introduced Design Thinking into their processes to address specific customer needs while building new products. Currently, customers expect outstanding customer service from customer-centric organisations rather than the old-fashioned product-centric businesses. For example, new technologies like AI have set new standards for Customer Experience because they provide quality feedback to customers’ needs in real-time. While on the other hand, it feeds the organisation with Big Data and Data Analytics technologies to enhance future digital strategies throughout iterative processes.

The gaps, digital education is vital even with the industry at the edge of technology because it prepares people to adhere to digital services turning into digital-based customers. In parallel, an industry’s good reputation is also crucial. Otherwise, it prevents customers from using digital-based products due to security concerns. Finally, attention to regulation is vital because it may boost the industry’s capability or prevent better outcomes depending on the pace of the regulatory developments.

As a recommendation, it is a must-do to adopt new technologies like cloud computing and blockchain and extensively apply them to develop new products. Therefore, enabling innovation. Nowadays, the industry shows that digitalisation is the foremost to maintain a sustainable business strategy with the example of leading organisations at the forefront of technology, like Google and Amazon. Moreover, collaboration with FinTechs is vital because these new businesses quickly produce innovation. Therefore, banks can provide infrastructure for FinTechs while acquiring skills to leverage innovation capacity. It is a win-win model that sets a sustainable perspective in the long term.

Notwithstanding, the collaborative business environment also helps with regulatory issues. While FinTechs foster new technologies, it deals with legal constraints towards banks’ accessing new technologies. Finally, Digital Transformation optimises processes while fostering innovation to improve customer services, which results in significant revenue enhancement from a loyal customer base. 

5. References

Valero, S., Climent, F., & Esteban, R. (2020). Future Banking Scenarios. Evolution of Digitalisation in Spanish Banking. Journal of Business Accounting and Finance Perspectives, 2(2). https://doi.org/10.35995/jbafp2020013

Rubaci, H., & Akgül, Y. (2019). Digital Customer Engagement Dimensions In Digital Transformation And A Framework Suggestion For Retail Banking. Journal of Life Economics, 6(3). https://doi.org/10.15637/jlecon.6.014

Naimi-Sadigh, A., Asgari, T., & Rabiei, M. (2021). Digital Transformation in the Value Chain Disruption of Banking Services. Journal of the Knowledge Economy. https://doi.org/10.1007/s13132-021-00759-0

Kolodiziev, O., Krupka, M., Shulga, N., Kulchytskyy, M., & Lozynska, O. (2021). The level of digital transformation affecting the competitiveness of banks. Banks and Bank Systems, 16(1). https://doi.org/10.21511/bbs.16(1).2021.08

Khanchel, H. (2019). The Impact of Digital Transformation on Banking. Journal of Business Administration Research, 8(2). https://doi.org/10.5430/jbar.v8n2p20

Galazova, S. S., & Magomaeva, L. R. (2019). The transformation of traditional banking activity in digital. International Journal of Economics and Business Administration, 7. https://doi.org/10.35808/ijeba/369

Filotto, U., Caratelli, M., & Fornezza, F. (2021). Shaping the digital transformation of the retail banking industry. Empirical evidence from Italy. European Management Journal, 39(3). https://doi.org/10.1016/j.emj.2020.08.004

Feher, P., & Varga, K. (2019). Digital Transformation In The Hungarian Banking Industry-Experiences With Design Thinking. Society and Economy, 41(3). https://doi.org/10.1556/204.2019.41.3.2

El-Gohary, H., Thayaseelan, A., Babatunde, S., & El-Gohary, S. (2021). An Exploratory Study on the Effect of Artificial Intelligence-Enabled Technology on Customer Experiences in the Banking Sector. Journal of Technological Advancements, 1(1). https://doi.org/10.4018/jta.20210101.oa1

Diener, F., & Špaček, M. (2021). Digital transformation in banking: A managerial perspective on barriers to change. Sustainability (Switzerland), 13(4). https://doi.org/10.3390/su13042032

Ali, A. (2021). Big Techs 2021. Virtual Capitalist. https://www.visualcapitalist.com/how-much-does-big-tech-make-every-minute/