Banks worried about ROI on digital transformation investments

DIGITAL transformation has been a critical issue for bankers across the world, primarily because failing to change could result in losing customers to competitors and new entrants.

Studies from academic institutions, think tanks, and even market research firms have expressed time and time again that customers are frustrated with the digital experience that banks provide and want to see them use smarter technologies that provide better access and faster service.

According to a recent Accenture study, banks are listening — and they’re investing a lot of money in digital transformation projects — but not many are getting the expected returns on their investments (ROI).

The study analyzed more than 160 of the largest retail and commercial banks in 21 countries and found that traditional retail and commercial banks have invested US$1 trillion globally over the past three years to transform their IT operations.

Many banks are also hard at work to shift the balance between “run the bank” and “change the bank” spending to ensure that the institution evolves at a competitive rate.

From the responses received, the think tank classified banks into three categories of digital maturity:

# 1 | Digital Focused

Only about one in eight global banks (12 percent) appear to be fully committed to digital transformation and are investing towards becoming digital-first banks. This is the only group with a price-to-book ratio above 1x.

“Digital-focused banks have taken the first step in building a future-ready bank, but they need to pivot their focus from efficiency and move to growth if they hope to close the valuation gap with fintech and big tech competitors encroaching on the banking business,” explained Accenture Senior MD Alan McIntyre.

# 2 | Digital Active

Approximately four in 10 banks (38 percent) are in the transformation phase but have not communicated a cohesive and compelling digital transformation strategy to the market.

Digital efforts result in a higher return on equity, with the expectation of more to come.

“Digital-active banks have made significant progress in their journey but need to focus on maintaining revenue growth while becoming more efficient and fully digital.

“To continue to win investor confidence and reap the rewards of digital investment, these banks would do well to focus on balance sheet growth by, for example, using Open Banking to help acquire and manage customer relationships.”

# 3 | The Rest

The remaining 50 percent of banks have not made significant advancements in digital transformation.

To improve their competitiveness, Accenture believes they should align and commit their strategies to digital transformation.

How banks can focus on revenue growth using digital

Digital transformation is supposed to help banks grow their revenues quickly. However, that hasn’t been the case for most financial institutions.

Despite their best efforts, banks — even the digitally focused ones — continue to struggle with revenue growth.

True, harnessing digital has helped reduce costs for many organizations already, however, success will come to those that can leverage it to grow revenues from new customers as well as new services.

Here are three things bankers chasing revenue growth through digital must might try in order to succeed:

# 1 | Focus on innovation

“Any attempt to expand into adjacent revenue fails where the end of the customer journey is an existing bank product.”

What banks really need to do is think outside the box and leverage technology to create new products and services that weren’t possible in the past and will delight customers because they’re pactical and immediately useful.

Digital identity and digital know your customer (KYC) services are one such avenue that banks could explore. They know their customers — and if they’re willing to share that information with new service providers via APIs, they could earn a fee, fuelling revenue growth from new sources.

# 2 | Enable dynamic stage gating

“Add more strategic specificity to desired productivity or growth outcomes and re-invent core investment approaches to enable dynamic stage gating. Too many players are allowing agile caterpillars to eat leaf after leaf with no breakout plan. Just because you may be ahead, don’t get complacent.”

# 3 | Evolve the business model

Accenture advises banks to do more than just empowering the innovation function to increase the chances of a successful digital transformation.

“Evolve the business model to be proposition-centric, featuring digital factories and special processes for procurement, talent management, and risk control,” advised the think tank’s digital specialists.

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