In fact, digital transformation has become an important factor for banks. As typical examples have demonstrated, a successful digital transformation strategy can bring countless benefits to businesses, including: increasing savings and account balances, reducing cost-to-income ratios, increasing customer attraction and retention rates, and shortening time to market.

However, the alarming fact is that only 30% of banks that have successfully implemented their digital transformation strategies have failed to achieve their goals. The majority of the rest have failed to achieve their goals. This low success rate is not unique to the banking industry but has been a common problem in many other industries over the years, despite significant technological and organizational innovations. However, technology-focused companies tend to have a higher success rate.

In this article, EDUTO analyzes the reasons why digital transformation banks fail, and suggests solutions to help banks increase their chances of success.

The bank transfer over the range of difficulty and unexpected years 

Many banks often blame limited technology budgets as the main reason for the failure of digital banking transformation. However, in recent years, there have been many cases where banks have devoted significant resources to this but still have difficulty in implementing it.

The nature of the banking industry poses unique challenges. On the one hand, banks have been investing in technology for decades, leading to the accumulation of large amounts of “technical debt” and complex and siloed IT structures. The separation between business and IT makes it more difficult to change organizational culture. Finally, banks’ workforces tend to be older than those of pure Fintech companies.

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1.1. Underestimating the cost and complexity of digital banking transformation

Digital transformation strategies start with a business analysis, and each analysis is timed to deliver results. However, when transformation initiatives exceed the initial project timeline, costs can escalate beyond the expected value of the transformation, or even lead to project cancellation.

In fact, more than half of digital banking projects exceed their original timelines and budgets, or even fail altogether. Bank leaders often underestimate the complexity of digital transformation, including complex interfaces, data management, and interdependencies between initiatives. 

Common mistakes in this process include: not fully engaging stakeholders in developing a detailed strategy and plan, misjudging the extent to which existing business processes need to change, and not fully implementing the changes needed to truly reap the benefits of transformation.

These challenges are particularly acute for banks, as business operations are often isolated from technological developments, business processes are perceived as fixed, and IT architectures are complex.

Initial budgets often fail to account for these factors, leading to delays in achieving efficiencies and resulting in costs spiraling out of control. However, the reality is that the transformation program is not as viable as originally envisioned. According to research by McKinsey & Company, 70% of digital transformation projects exceed their initial budgets, and 7% of them end up costing double what was originally projected.

1.2. Not focusing on technical debt when banks transform digitally

In early digital transformation budgets, addressing “technical debt” is often overlooked or considered less important than other initiatives. Technical debt includes cleaning up legacy technology platforms, unused applications, and redundant infrastructure. 

However, it is a prerequisite for rapid digital transformation, even if it does not bring immediate financial benefits. Therefore, banks need to assess and prioritize addressing technical debt from the beginning of the digital transformation process.

In general, banks tend to have higher technical debt than other industries due to their legacy IT applications (see chart). This makes it more difficult to create the foundations needed for a digital future.

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1.3. Challenges in measuring effectiveness

“As the saying goes, what gets measured gets done.” However, in reality, very few organizations actually measure performance, and as a result, fail to achieve key financial goals during digital transformation. Bank leaders need to identify key impact indicators, benchmark the current state, and track the impact during and after the digital transformation of the bank. Only then can they reap the full financial benefits of the transformation effort.

Banks often struggle to accurately quantify and track the impact of their digital strategy and clearly link specific initiatives to revenue growth and profitability. Often, leaders fail to capture the full value of their digital strategy due to a lack of clearly defined success metrics, failure to fully engage end users (customers, employees, and other stakeholders), and failure to account for potential negative impacts on customer satisfaction.

1.4. Slow pace of change in the digital transformation of banking

Large banks often lag behind their competitors in terms of speed of innovation and productivity. Their reliance on traditional operating models, combined with limited adoption of Agile practices, can hinder the success of digital transformation. 

A McKinsey banking survey found that while fintechs and neobanks deploy new product features in an average of two to four weeks, traditional banks have a product implementation cycle of four to six months. McKinsey research also found that large banks are 40% less productive than “digital natives.” This slow pace of change can lead banks to abandon digital transformation rather than try to overcome the underlying cultural barriers that are holding them back.

1.5. Lack of technology talent helps banks transform digitally

While traditional banks have a strong track record in recruiting banking talent, the same cannot be said for tech talent. In fact, banks are not a preferred destination for this talent, while “tech talent” is the key to successful digital transformation. 

McKinsey research shows that at least 50% of the workforce involved in a bank’s digital transformation should be internal – and the risk increases significantly when 70% or more of the workforce is outsourced. To ensure the success of digital transformations, traditional banks need to refine their employee value proposition to attract more “tech talent” – for example, by offering benefits and work environments that are comparable to those of fintech companies.

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1.6. Existence of silos in the organizational system

A successful digital transformation relies heavily on close collaboration and coordination across departments across the organization. However, many banks continue to operate in traditional silos, leading to conflicting or conflicting priorities, lack of clarity, and fragmented execution across departments. 

Banks often have duplicate systems and solutions, such as customer relationship management (CRM) platforms and SME channels, across business lines. Similarly, banks with strong country-specific operating models often overlook the efficiency gains that can be achieved by reusing existing functions across regions.

Plan for the future of successful digital banking transformation

To overcome these challenges, bank leaders need a comprehensive strategy that encompasses business, technology, and operating models. Going all-in on digital transformation can help banks avoid some common pitfalls and reap significant benefits.

For example, a large European bank redesigned its operating model and redefined roles and responsibilities to embed Agile practices across the entire organization. At the same time, the bank upgraded its core banking systems, including a complete overhaul of its integration and data architecture. These measures resulted in 30% cost savings and improved the bank’s ability to deliver long-term value for the future.

Initiatives that banks can consider to help them achieve success in digital transformation include:

• Reducing complexity: This can include simplifying user interfaces and resolving dependencies between systems. Using approaches such as “micro front-ends,” reusable APIs, and adopting DevSecOps (integrating software development, security, and IT operations) as a standard for digital transformation initiatives will help reduce complexity and avoid potential risks during implementation.
• Estimate technical debt and budget for resolution: The initial budget should include the cost of resolving technical debt – that is, old and poorly maintained systems. Failure to address technical debt will result in delays and increased costs in the future.
• Investing in cultural change: Investing in changing the organizational culture, even if it is not directly related to technology, is key. A culture of openness, willingness to learn and adapt to new environments will support the digital transformation process of banks more effectively.
• Attracting tech talent: Building an attractive employee value proposition to attract tech talent is essential. Avoid relying too much on outsourcing for your digital banking transformation, as this can lead to a lack of skills and deep understanding of banking.
• Break down silos: Eliminate silos by department or business unit. Plan for the overall transformation of the entire organization, not just by individual units. This will drive coordination and maximize the use of the bank's resources.

By taking these steps, banks can mitigate common challenges and increase their chances of success in their digital transformation journey.

To measure the effectiveness of digital transformation, banks need to adopt Agile methods and processes. For example, holding quarterly business reviews will allow for prioritizing performance and tracking value. 

Instead of traditional monitoring methods, banks need to move to cross-functional collaboration, cross-silo performance management, and a new concept of shared accountability between business and IT. Throughout the process, leaders can select high-performing projects to inspire employees and build momentum.

EDUTO - Consulting and solution implementation partner to help banks successfully transform digitally

In the context of constantly developing technology and increasingly diverse customer needs, banks are facing great pressure to successfully implement digital transformation. EDUTO , with just 2 years of experience but we have diversity field to development, specially in consulting and implementing technology solutions, is proud to be a trusted partner, helping banks overcome challenges and achieve digital transformation goals.

Contact EDUTO to get advice from experts in the field!

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