Achieving success in digital transformation requires banks to rethink their strategy across various areas, including business operations, technology infrastructure, and organizational structure.

For banks, embracing digitalization is no longer optional. A successful transition to digital platforms can result in improved business performance metrics such as increased balances in savings accounts, reduced cost-to-income ratios, higher rates of customer acquisition and retention, and quicker product launches.

Despite the widespread recognition of the importance of digital transformation, only about 28% of banks that have embarked on this journey report achieving their digital strategy objectives. This trend is not unique to the banking sector, as many industries struggle to meet their transformation goals, with technology-focused companies often being the exception.

This post explores the common reasons why banks struggle to successfully execute their digital transformations and offers strategies to increase the likelihood of success.

Pitfalls to steer clear of

Many banks believe that having a substantial technology budget is the key to successful transformations. However, numerous banks have allocated considerable resources to their digital initiatives in recent years, only to encounter difficulties in executing them.

The banking sector faces unique hurdles in its digital transformation efforts. Years of investment in technology have resulted in substantial technical debt and complex IT infrastructures. Additionally, the traditional segregation between business and IT functions complicates cultural changes. Moreover, the banking industry contends with an aging workforce, in contrast to the typically younger talent pool in digital-native FinTech companies.

We’ve pinpointed a shared array of execution obstacles that jeopardize banks’ digital evolution and then offer a series of suggestions for surmounting these hurdles:

Undervaluing the intricacy and expenses involved

A digital strategy starts with a business case, and each business case is designed with a particular timeline for results. When transformation projects exceed their expected duration, the rise in expenses can sometimes surpass the anticipated benefits of the initial transformation or even result in its termination.

More than half of digital banking transformations surpass their initial timeline and budget or end in failure. Leaders often overlook the intricacies involved in executing a digital transformation, which frequently entail intricate interfaces, data management, and interconnectedness across various initiatives. Common missteps include inadequate involvement of all stakeholders in strategy and blueprint development, underestimation of the extent of necessary changes to existing business processes, and insufficient implementation of the scale of changes needed to fully realize the transformation’s benefits. These challenges are particularly pertinent for banks, where there’s often a disconnect between the business side and technology developments, assumptions that business processes are static, and a highly complex IT architecture landscape.

Initial budgets frequently overlook these factors, resulting in delayed impacts and the perception of costs spiraling “out of control,” even though the program was never viable as initially envisioned. Nearly 75% of digital transformations exceed their original budgets, with 10% ultimately costing more than double the initial projection.

Failing to accurately assess technical debt

The necessity of tackling technical debt—by streamlining legacy tech stacks, eliminating obsolete applications, and reducing excessive infrastructure—is frequently overlooked in initial transformation budgets or seen as less crucial than other initiatives. Nonetheless, it is essential for achieving a swift digital transformation, even if it doesn’t yield immediate financial benefits. Consequently, banks must evaluate and prioritize the task of addressing technical debt from the outset of a digital transformation.

Banks generally face greater technical debt than other industries due to their numerous legacy IT applications, complicating the creation of the necessary platform for a digital future.

Difficulties in assessing impact

As the saying goes, what gets measured gets done. However, few organizations successfully measure and deliver top- and bottom-line value throughout a digital transformation. Banking leaders need to pinpoint essential impact metrics, establish a baseline, and monitor the effects during and after the transformation to fully realize its financial benefits.

From our observations, banks often find it challenging to accurately measure and track the impact of their digital strategies, and to establish a clear connection between specific initiatives and revenue or profit growth. Leaders frequently miss the full value of their digital strategies due to poorly defined success criteria, insufficient engagement with all end users (customers, employees, and stakeholders), and neglecting potential negative effects on customer satisfaction.

Delayed implementation

Big banks often trail their rivals in innovation speed and productivity. Their dependence on conventional operating models and limited use of agile methods can obstruct digital transformation success. While FinTechs and Neobanks typically launch new features every two to four weeks, traditional banks have product cycles spanning four to six months. This slower pace makes them 45%-50% less productive than digital-native firms, leading some banks to abandon their digital transformations instead of addressing the cultural barriers that slow down the process.

Talent shortages

Traditional banks often excel in recruiting banking professionals, but they may struggle to attract tech talent, which is crucial for successful digital transformations. Banks are not typically the top choice for tech talent, posing a challenge for their digital initiatives. Research indicates that having at least half of the transformation team composed of internal employees is optimal, as excessive outsourcing can elevate risks. To enhance their digital programs, traditional banks must revamp their employee offerings to appeal more to tech professionals, offering competitive incentives and work environments akin to those offered by FinTech companies.

A culture of collaboration vs organizational silos

Effective digital transformation requires seamless collaboration and coordination across all facets of the organization. Yet, many banks persist in operating within traditional silos, leading to conflicting priorities, unclear objectives, and disjointed execution strategies. Commonly, banks maintain redundant systems and tools across various business units. Likewise, those with robust country-level operations often overlook opportunities for efficiency by failing to leverage existing capabilities across different regions.

A more favorable direction

Addressing these challenges necessitates banking leaders adopting a comprehensive strategy that spans the entirety of the business, the technological infrastructure, and the operational framework. However, based on our observations, fully committing to a digital transformation can help banks circumvent many common obstacles and unlock substantial advantages. For instance, a prominent European bank undertook a comprehensive restructuring of its operational model, redefining roles and responsibilities to embed agile methodologies across the organization. Concurrently, it modernized its core banking system, implementing a thorough revamp of its integration and data architecture. These initiatives resulted in a 33% reduction in costs and significantly bolstered the bank’s capacity to deliver enduring value in the long run.

Essential Factors for Achievement

To overcome these challenges, banks can take several proactive measures, some of which may not be immediately obvious:

• Simplify processes and streamline interfaces to reduce complexity, addressing dependencies upfront to avoid unforeseen obstacles.
• Assess and factor in the cost of addressing technical debt in the initial budget planning to prevent delays and unexpected expenses later on.
• Prioritize investment in cultural transformation, recognizing its importance even if it’s not directly linked to technological changes.
• Focus on the balance: 50% – attracting tech-savvy talent internally, and 50% – relying on external outsourcing for the transformation process.
• Break down silos within the organization and develop a comprehensive transformation plan that encompasses all areas of the business, not just individual departments.

To gauge progress, it’s essential to implement agile methodologies and procedures like quarterly business reviews, enabling efficient prioritization and tracking of value. Instead of conventional supervision, foster cross-functional cooperation and unified performance evaluation across different departments. Embrace a shared responsibility approach between business and IT, fostering joint accountability. Additionally, showcase “lighthouse” initiatives to motivate staff and propel momentum forward.

Undertaking a significant digital transformation in banking is undoubtedly challenging, and it’s no wonder that many banks face difficulties in meeting their business targets on schedule and within budget. Nonetheless, banking executives have the opportunity to sidestep common pitfalls by establishing precise objectives and metrics that encompass not just the business shifts but also the necessary cultural and technical adjustments. This strategic approach enhances the likelihood of success and enables banks to fully harness the benefits of their digital overhauls.