This article originally appeared in The Financial Brand Insights Magazine
Most banking leaders give themselves a so-so grade when it comes to progress in technology. According to a recent study published by CFM+NXTsoft, they feel their organizations are at a similar place to last year, even though they’ve made tech investment a priority.
The overwhelming majority (85%) said their top priority for technology investment is to improve the banking experience.
Asked to cite their desired business results from those investments, leaders ranked digital banking first, sales growth second and upgrading the branch experience third.
Institutions also chose real use cases that solve pain points for both institutions and consumers alike. 69% of executives say digital onboarding is the focus to create a better client experience. Right behind that was trying to improve their mobile app, at 63%.
Most (68%) said integrated fintech partners are critical to their strategy. (Percentages exceed 100% because respondents could select all applicable answers, not just one.)
Tech investments proved to be worthwhile as well. When asked how tech affected sales year over year, nearly half (47%) of leaders reported sales growth. That’s a 12-point increase from CFM+NXTsoft’s 2022 study, when 35% reported increases in sales.
So, why did it take time for sales to ramp up? And why do leaders feel they’ve made slow progress? Experts at McKinsey say it’s because an institution’s people must adopt new technology and bring it to market. To do it well, they must build an “API-first culture” to achieve business results from technology.
Why API-First Culture?
Put simply, APIs, or application programming interfaces, eliminate typical archaic siloed banking systems and provide a connection for multiple applications to communicate and securely share data (such as a core banking system and a loan origination system) to enable seamless client experiences. Yet some organizations are still wrapping their arms around what APIs are and how the business can benefit from them.
In 2020, the majority of institutions wanted to use APIs for cost savings, particularly in the IT department. In 2022, the majority wanted APIs for innovation. “The shift…has been striking,” McKinsey researchers wrote. “Innovation was ranked fifth in 2020 but became the leading reason for API deployment just two years later,” McKinsey said. “With these new systems in place, financial institutions can focus on new products and services that increase revenues.”
Leaders who participated in Kinective’s study recognize that revenue growth does not come from embracing technology alone. In fact, they said staff training outranked all other tactics, even upgrading digital and mobile offering, as a driver for increased sales. Staff training, however, is not an alternate objective to digital banking investment, McKinsey observed, as training and investment are interdependent.
Financial institutions have “achieved a technological maturity that outpaces the business side’s understanding,” the researchers wrote. At one large bank, for example, “the IT function was technologically ready to provide an appealing loan offering through APIs to a niche group, but it took the business more than six months to deliver its part and go to market with the product.”
In other words, the tech was ready, but people took longer to adapt to change.
Where to Start
McKinsey recommends financial institutions start small with a few internal APIs and then scale from there to increase the likelihood of adoption and success. Banks and credit unions can then build organization excellence specific to digital transformation, which they can use to push that transformation business impact.
An API-first culture means everyone is looking for every possible obstacle to success, and that includes alignment of top executives with teams, eliminating obstruction in old IT infrastructure, breaking down siloes between teams and recruiting talent wherever necessary. McKinsey lays out four elements of that type of culture:
Involve all stakeholders in the development of the strategy and blueprint
More than half of digital banking transformations exceed their initial timeline and budget — or fail — because leaders often underestimate the complexities of execution. Too often, this results in initiatives that extend beyond their expected duration. Unexpected costs often overtake the projected value of the original transformation or even lead to its cancellation.
Budgets can spiral out of control because they were never feasible in the way it was originally envisioned. According to our research, 70% of digital transformations exceed their original budgets, and 7% end up costing more than double the initial projection.
Leaders must engage internal subject matter experts to understand:
- The magnitude of changes required to truly reap the benefits of the transformation.
- What it will take from an IT architecture standpoint to make aspiration into reality.
- How the business side will learn about and train to technology developments.
- What the organization must change in its business processes to realize the benefits of the technology.
Obtain a complete picture of the institution’s technical debt
Banking has a significant amount of technical debt, along with a siloed and complex IT architecture.
To prevent old infrastructure from challenging success in digital transformation, institutions should clean up legacy technology stacks, unused applications and excessive infrastructure.
McKinsey reported this step is “often missing from initial transformation budgets or perceived to be less important than other transformation initiatives.”
Overinvest in the cultural shift
Institutions’ people will need to work together in ways they never have before. Successful digital transformation relies on close collaboration and coordination across the organization, McKinsey said.
“Many banks continue to operate in traditional functional or business silos, which leads to conflicting or misaligned priorities, lack of clarity and a fragmented approach to execution,” researchers observed. “In our experience, banks often have duplicate systems and solutions, such as customer-relationship-management (CRM) platforms and small and medium-size enterprises (SME) channels, across business lines.
“Break down organizational silos,” they recommend, “and design a holistic transformation road map (not just by business area).”
Hire talent, rather than outsourcing
McKinsey found that at least 50 percent of employees involved in the transformation should be in-house. Risk of transformation failure increases significantly when 70 percent or more of the employees involved are outsourced. The challenge, though, “is that banks are not the preferred destination for tech talent — but talent is a key prerequisite for making the digital transformation work,” researchers said.
Traditional banks should consider incentives and work environments that rival those of fintechs to attract more tech talent.
Culture Unobstructed by Slow Tech
Institutions can’t get revenue growth simply from buying tech, but the technology does need to lead the rest of the organization through a digital transformation. Leaders should be wary of transformation initiatives that extend beyond the expected project duration, McKinsey advised. For financial institutions, unfortunately that’s easy to do.
“Digital natives,” or fintechs and neobanks, release new product features every two to four weeks on average. “Traditional banks have product rollout cycles of four to six months,” researchers reported. Even “large banks are 40 percent less productive than digital natives.”
Institutions simply cannot afford a slow pace of change in getting APIs operational. Moving too slowly “can cause banks to give up on their digital transformations,” McKinsey said. Experts at CFM+NXTsoft have observed partner institutions reducing their time to launch on APIs to 90 days. Then, with tech on schedule, leaders can focus on overcoming the underlying cultural barriers that inhibit the speed of the transformation.