Which Aspects of a Bank's Digital Transformation Should Be Evaluated before Investing in It

Denis Astapchenia

Denis Astapchenia

Director of Financial Technologies

Financial Services
Jul 21, 2020
6 minutes to read
  1. How much will it cost for a bank to go digital and how can this be calculated?
  2. How to avoid this?
  3. Role of the Digital Transformation Director
  4. How to check this?
  5. Digitalization is not equal to digitization
  6. What to pay attention to?
  7. Solution
  8. Top managers of the bank and their understanding of the need for digital evolution
  9. What is the level of the bank's IT team?
  10. To sum up
  11. How much will it cost for a bank to go digital and how can this be calculated?
  12. How to avoid this?
  13. Role of the Digital Transformation Director
  14. How to check this?
  15. Digitalization is not equal to digitization
  16. What to pay attention to?
  17. Solution
  18. Top managers of the bank and their understanding of the need for digital evolution
  19. What is the level of the bank's IT team?
  20. To sum up

Nowadays, the growth in the efficiency of the banking enterprise directly depends on its digital transformation. Larger investment capital is received by those banks that have a digital strategy and augment their success by automating the business for customers and employees.

We spoke with IT Directors of Eastern European banks to figure out the following issues: how an investor can recognize whether a bank is really on the path of digital transformation, how this path differs from conventional digitalization, and what non-obvious things one should pay attention to before investing with a bank.

How much will it cost for a bank to go digital and how can this be calculated?

A bank's ambitiousness = the volume of investments in its digitalization, where digitalization is the creation of a new/innovative process/product, not just its digitization.

We interviewed representatives of ten banks and came to the conclusion that the amount of investments needed to increase the process’s profitability should be about 10% of the bank's annual costs during the active transformation phase.

The active phase lasts on average from one to three years. Later on, the volume of investments may gradually decrease. However, it is necessary to understand that digital transformation is a process that cannot be stopped once launched. This process requires constant financial support.

Problem: Many IT Directors cite the challenge of justifying and hence receiving investments as the main hindrance for the large-scale transformation of the bank. One of the main mistakes of those who advance arguments for the size of potential dividends is an excessively straightforward approach. Shareholders receive a cost estimate, and as a rule, few of them are mentally prepared for the figures.

How to avoid this?

Focus not on costs but on indicators. These are what reflect the influence of investments in digitalization that the bank will receive: the money and time saved, labor productivity growth, etc.

Role of the Digital Transformation Director

The role of the Digital Transformation Director is not new but is still popular. The position of Chief Digital Transformation Officer or CDO appeared in Western countries back in the 2000s due to the leap forward in technology and the emergence of social media.

Today the question is, how to evaluate the result of a CDO’s work. Obviously, the evaluation should be based on specific metrics, such as increased penetration of digital channels, growth of the customer base and customer satisfaction, the effectiveness of products/channels, and a number of others.

It can take quite a long time before the metrics, which the company considers necessary KPIs, are reached. Therefore, it is important to identify specific intermediate indicators. After all, speeches at conferences, promising articles in industry publications, presenting grandiose plans in front of top managers - all this is not a digital transformation of a bank.

From this angle, most transformation directors are not able to seriously influence anything; rather, they perform a marketing function, presenting the bank as a modern financial institution in the eyes of customers and competitors.

How to check this?

Digital transformation is unlikely to last less than three or four years. Take a look at the previous jobs of a potential candidate for this position and see if they managed to finish the process.

Digitalization is not equal to digitization

It makes no sense to change the bank's business model by changing only its facade. In the same way, you can’t replace the digitalization of a bank with its digitization. The key difference between these terms is that digitalization involves the creation of a new/innovative process/product, while digitization is simply an improvement of existing processes/products.

As a result, digitization doesn’t lead to significant savings. Let’s consider the loan issuance process, for example. Today, the process of application submission is digitized by many banks, and a client often doesn’t need to visit a branch. However, the processing of the request and making a decision on it is performed by the bank employees and takes hours or even days. This approach can be called digitization. At the same time, there are many examples when the lending process is fully automated, and thanks to the decision-making system, the loan is issued almost in real time and without the participation of the borrowing customer. Such a lending process is quite consistent with the concept of digital.

In most cases, banks choose a less thorny path and try to digitize existing business processes in a straightforward manner, passing it off as a breakthrough.

What to pay attention to?

Anyone who stands for the digitalization of a business should, first of all, think about how to make the processes truly effective. The measure of this effectiveness can be the depth of exclusion of the human factor from business processes.

Has the bank developed a unified approach to creating business processes?

Our respondents noted that 90% of the processes used by the bank had been created by an “unknown specialist”. This statement is based on the way certain processes usually appear in the bank. The chain often consists of three steps:

  • The bank regularly faces the problems of launching new products, low profitability of existing ones, overly long decision-making time on a product, complaints and customer dissatisfaction, etc.;
  • Managers set tasks of solving the above-mentioned problems for subordinates;
  • The contractor follows the path of least resistance and creates a process that is convenient primarily for themselves, simply copying what they did at their previous place of work.

The problem is that contractors don’t always have the necessary out-of-the-box thinking to build a process that is