Digital Transformation For Financial Systems In A Changing World (2024)

By Steve Morgan, Global Banking Industry Market Lead, Pegasystems

There is no doubting that the banking industry and financial services as a whole are evolving at a rapid pace as the speed of technological innovation accelerates. Neobanks and fintechs, who are functioning on forward-looking technology stacks without the burden of legacy infrastructure, are eating up the market share of legacy players. At the same time, geopolitical risks continue to proliferate whilst the regulatory environment concurrently evolves regarding sanctions, net zero and other ESG concerns. Customer expectations have also changed markedly, with personalisation emerging as a key priority to maintain an excellent standard of customer engagement and service.

Financial service operators need to be forward thinking to be able to mitigate risk and navigate this unfamiliar landscape. To overcome these challenges, banks should invest in their own digital transformation efforts. If this is done right, it will open up huge opportunities for financial services providers to lead on innovation in the sector. At the same time, it will enable banks to deliver a high standard of customer service excellence. But how can they do so effectively?

Transforming legacy systems into banking as a service

Banks should not be mistaken in thinking that they need to overhaul the entirety of their legacy systems to keep pace with industry-wide digital transformation concerns. Rather, they should focus on the process of connecting legacy systems with new capability and functionality through more adaptable low code automated platforms This effectively ‘hollows out’ core systems and enhances functionality beyond what legacy systems can do today. This is an easier and cheaper way for banks to digitally transform operations to keep pace with changes in the industry.

In recent years, one of the oldest and most renowned banks in the world wanted to bring a more personalised and customer-first approach to banking by way of delivering tailored experiences to their customers. Unfortunately, siloed back-end processes made it difficult for customer service agents to extend their well-renowned in-person customer engagements across digital channels.

For this financial institution, developing and implementing a customer focused decision hub allowed them to unify their in-person and digital services. This required harnessing the power of a centralised real-time decision-making ‘brain’ to drive all customer engagements, in-person and online. Connecting systems across all channels meant this financial institution had better visibility over customer inputs to better understand individual needs, leveraging artificial intelligence (AI) to respond to their needs in real time. This demonstrates how financial institutions can leverage innovations in technology to support and streamline backend and customer facing processes, enabling them to deliver a more complete customer-facing offering as a result.

Furthermore, intelligent automation platforms can help bridge the gap between legacy systems and new technologies, which will allow banks to offer new products that combine the best of both worlds, such as banking-as-a-service (BaaS). This model is enabled by the seamless integration of financial services and products into other types of customer activities, integrating with non-financial digital platforms typically.

Using a BaaS model, non-bank businesses can offer customers digital banking services, without necessarily requiring a banking licence. It allows banks to expand their customer base and increase their revenue, whilst at the same time allowing the third-party non-banking brands to offer their customers a more streamlined experience.

Financial crime and case management

As part of digital transformation efforts, intelligent automation can also make managing financial crime more efficient and effective for banks. As the nature and frequency of financial crime continues to evolve today, enhanced risk management tools are essential. Also, with escalating geo-political tensions as a result of the Russia-Ukraine and deteriorating US-China relations, it has meant that banks are under a lot of strain to manage straight through payment processing effectively whilst reducing their operational costs. This is important especially now as there are 5,581 sanctions currently in place against Russian residents and businesses.

In order to navigate this, financial service operators must ensure they have an up-to-date service backbone, capable of enhanced risk management. This should effectively manage the possibility of rising financial crime and sanctions, whilst at the same time simplifying the servicing of accounts. This can be accommodated by implementing a best-of-breed approach that marries investments in legacy systems with newer, AI-based automation technologies.

Leveraging the capabilities of enhanced risk management tools, banks can connect case management platforms to their own fraud and sanctions screening tools for workflow efficiency. During this process, intelligent automation and AI can be used to ensure cost-savings on operations and compliance due to increased backend system automation. It also allows for improved detection and management of financial crime.

For this to be successful, all customer information should be easily accessed from a separate platform, leaving data in the systems of record, but maximising reuse and streamlining the operational process. This makes it easier to add new rules into the platform which helps keep pace with fast-moving regulatory changes.

Digital transformation for sustainability and net zero

Sustainability and net zero are rising up the priority list for financial services institutions, with customer demand for ‘green’ banks skyrocketing. Recently, Deloitte’s Better Banking Survey showed that 71 percent of customers are more likely to choose a bank that has a positive social and environmental impact. At the regulatory level, the International Sustainability Standards Board (ISSB), previously launched at COP26, announced earlier this year its work on setting out a wide-ranging global baseline of sustainability goals and standard measures for the global financial market.

To make the sustainability transition easier for banks, they should begin by embedding sustainability assessments into lending and supply chain processes. Here, environmental, social, and corporate governance (ESG) guidelines and data feeds can be incorporated into lending decisions and pricing. When paired with intelligent automation powered ‘know your customer (KYC)’ and ‘know your vendor’ (KYV) solutions, banks can make sure they keep pace with the evolving nature of the regulatory landscape whilst keeping lending, pricing and supply chain process costs down.

This is already happening with platform solutions on the market, which actively work with organisations to drive carbon reduction through AI and case management. For businesses, these solutions supports businesses in monitoring their capabilities via a guided maturity journey. For customers, these platforms allow them to see and take actions to proactively reduce their carbon footprint. As well as this, using these solutions, blockers which are stopping businesses to digitally transform are overcome and ESG obstacles are dealt with. Through more simplified backend processes, supply chain management is also improved, as well as enabling reductions in areas of direct impact like consumption of paper or fuel.

So, how can banks succeed in a changing financial world?

Where banks and financial services are concerned, there is no doubting that digitalisation efforts are pivotal to grow and thrive now more than ever. Banks should prioritise building out a service backbone to help simplify the servicing of accounts, improve internal efficiency, and deliver better customer service. This will enable them to grow new revenue streams such BaaS, as well as to effectively navigate risks in a changing financial landscape including financial crime and ESG.

There has never been a greater need than right now for banks to embrace digital transformation and balance it effectively with a personal touch. Getting that balance right and digitizing effectively is the way to both meet stakeholder and customer demands, as well as manage risk and succeed amidst fierce competition.