1. Digital Bank Transformation
“Banking is at a crossroads and decisions taken today about the pace and direction of travel may
ultimately decide the future of institutions!”
Page 1
Digital Bank Transformation Whitepaper
The imperative for digital transformation in banking.
“The banking industry is at a crossroads and technology is driving unprecedented change. Mobile and
online in particular will completely revolutionise the banking landscape. Innovations in payments
have led the way, but ultimately the entire banking value chain will be impacted. Adoption of mobile
banking has shown phenomenal growth in some territories, demonstrating how new technologies
can change the face of banking almost overnight. Barriers to market entry have been greatly
diminished by technology, reducing the ability of the traditional banks to fend off competitive
threats, whilst simultaneously dealing with the almost overwhelming burden of regulation. In the
face of digital disruption, many banks are poorly equipped for the future. Despite many other
strategic priorities, it is essential that banks act now to transform their structures, processes and
mindset for the digital future.” Jon C Davies, Banking Strategist.
Many banks are not well equipped for a rapidly
changing marketplace or the digital future that
lies ahead. Most of these institutions would not
look like they do, if they were being designed
today. A multitude of complex interwoven
processes have grown organically within the
back office, often exacerbated by previous M&A
activity and a subsequent failure to integrate.
Meanwhile the existing technology estate is an
enormous cost burden and acts as an inhibitor
of business agility and change. On average,
more than 76% of all bank IT spend currently
goes on ‘keeping the lights on’!
The established banking brands are currently
facing unprecedented competitive threats from
a variety of new entrants and tech. savvy rivals.
Whether or not they realise it yet, many are
engaged in what is potentially a battle for
survival. As banking becomes increasingly
mobile and virtual, new digital technologies will
be at the heart of the entire business model.
These technologies offer new entrants the
ability to create a lean, efficient, virtual banking
organisation that is not burdened by its legacy.
As investment in mobile, digital and online
banking has increased, so the decline of the old
style retail branch network has accelerated.
Today these physical estates are looking
increasingly anachronistic. Whilst some banks
have been trialling experimental branch formats,
these have tended to show a limited return on
investment to date.
In some markets ’challenger banks’ with full
mobile and online functionality are targeting the
many disaffected customers of the established
banking brands. Ironically, as a direct result of
the financial crisis, banking with a new entrant
or non-traditional player is far less risky these
days in light of the deposit guarantees offered
by many governments.
It remains to be seen just how much leaner,
customer focused and efficient these new
entrants will be in the long run. However, the
’challenger banks’ are not weighed down by
enormous overheads. Many are already trusted
‘mega-brands’ with potent CRM and analytic
capabilities facilitating effective cross sell/up sell
and customer service. The established banks
must respond to the threat as a priority as many
of the agile new entrants may potentially have
the competitive edge over the traditional banks.

2. Digital Bank Transformation
“Banking is at a crossroads and decisions taken today about the pace and direction of travel may
ultimately decide the future of institutions!”
Page 2
The banking industry has fended off competitive
threats in the past. However, many of the
advantages that have protected banks in the
past have since been lost. Furthermore digital
technologies have significantly leveled the
playing field. Customer acquisition, servicing
and retention can all be facilitated via digital
online and increasingly mobile means. Recent
failures and scandals also mean that the
reputations of the banks have no real currency.
Payments innovation by non-banks has greatly
enhanced the customer experience and given
these players access to customers of the
traditional banks. ATM and branch networks are
no longer differentiators, with the growth of
cashless, mobile and online transactions having
greatly diminished the value of these assets.
Meanwhile the extra demands imposed as a
result of new regulation have placed a massive
additional burden on the banks. In the face of
heightened regulatory scrutiny the banks, their
back office processes and their technology are
potentially under more pressure than ever
before. Regulatory compliance is not optional!
The volume of regulatory traffic affecting the
banking industry is extreme. Whilst regulatory
priorities vary from region to region, there is a
multitude of new rules and regulatory structures
impacting banks worldwide. Regulation is at the
very top of the major risks impacting the
industry. These regulatory demands are
currently expected to keep rising. A significant
portion of IT maintenance spend is driven in part
by regulatory compliance, whilst up to 50% of
discretionary IT spend has a compliance
implication.
Despite the many other priorities facing them,
banks must not ignore the imperative to take
action on digital transformation. To be able to
compete effectively in the digital future that lies
ahead, institutions should embrace enterprise
wide change to their structures, processes and
mindset.
Digital banking investments are bearing fruit
across the value chain. Online is now the most
frequently accessed channel on a monthly basis
and one of the fastest growing channels.
Projections show that the majority of customers
will soon prefer online and mobile channels for
routine access.
Digital banking has already shown
extraordinary growth and is now an established
part of the service model and the client
experience. In the UK there were 19 million
transactions a week via apps in 2013, up from
just 9 million in 2012. Spanish bank BBVA
recently revealed that 90% of financial
transactions are now completed outside of its
branches thanks to service digitisation and the
new branch model. That statistic speaks for
itself and provides further evidence that the
traditional high street branch is unlikely to play a
significant role in the future of banking.
There is considerable scope in other regions for
banks that embrace digital transformation to
attract new clients. In emerging markets digital
methods provide the opportunity to tap the vast
unbanked segment. Widespread mobile
payments adoption took less than seven years in
Kenya as a result of enthusiastic support for the
M-Pesa system. In a country without a
significant physical branch network, this
demonstrates the potential of digital to change
the face of banking almost overnight. Full scale
mobile banking adoption is already following a
similar path in Kenya via M-Shwari.
In the face of the heightened competitive threat
from new entrants the established banks must

3. Digital Bank Transformation
“Banking is at a crossroads and decisions taken today about the pace and direction of travel may
ultimately decide the future of institutions!”
Page 3
adapt their products and services and
significantly enhance the customer experience in
order to engage and retain their customer base.
In particular, banks must fight hard to retain
their younger customers who will be the high
net worth individuals of tomorrow.
There are considerable demographic differences
in customer perceptions. Many 18 to 34 year
olds no longer value the traditional bank branch
and would be happy to rely on a purely
mobile/digital relationship. The proportion
favouring mobile/digital will inevitably grow
over time, just as online commerce has itself
seen inexorable growth. Many of these
‘Millenials’ view their relationship with their
bank as purely transactional.
Analytics is as fundamental part of any digital
strategy and a vital investment area for banks.
The effective capture and utilisation of the
wealth of customer and transactional data at
their disposal will be key to the long term
prosperity of the banks. Analytics offers the
potential to extract significant value from
customer data via improved customer,
acquisition, retention, experience and lifetime
value.
Used in tandem, digital methods and effective
analytics help to inform and accelerate the
product development process and significantly
enhance the relevance of service offerings. In
turn, this facilitates the effective marketing of
products and services. The business case for this
type of initiative is well established and analysis
shows that, 70% of financial services firms, with
established analytics initiatives, have justified
their business case.
Whilst the drivers for digital transformation are
not primarily focused on efficiency, embracing
digital offers banks the opportunity to radically
reduce their cost base. By implementing swift,
consistent, automated processes as part of a
comprehensive digital strategy, banks can begin
to transform the multiple processes throughout
the organisation and rapidly improve the cost of
sale.
Those banks that have been early adopters of
digital transformation have demonstrated the
potential cost benefits of this approach. Many
have yielded significant improvements in their
underlying efficiency ratios, with the ‘best in
class’ occupying the 30% to 40%nt range.
Whilst most banks are already highly vigilant
with regards to the threat posed by cyber-
crime, a comprehensive digital transformation
strategy can also provide a holistic approach to
effectively managing that threat. Whilst many
of the outdated back office technologies present
within banks today are vulnerable to cyber-
crime, to a certain extent digital transformation
introduces a different set of risks. However, the
good news is that, by its very nature, digital
transformation provides the facility to integrate
preventative techniques. As a result, these
safeguards become embedded in the processes,
rather than occurring in a disconnected manner,
typical of many institutions today.
As the banking industry seeks to prioritise
resources whilst juggling a multitude of
priorities and competitive threats, the agility
offered by the cloud model presents an
increasingly compelling business case. Indeed,
the flexible, efficient approaches offered by
infrastructure virtualisation and the cloud are
key elements of a comprehensive digital
transformation programme.
A great example of this approach comes from
Australia’s forward looking banking industry.

4. Digital Bank Transformation
“Banking is at a crossroads and decisions taken today about the pace and direction of travel may
ultimately decide the future of institutions!”
Page 4
Commonwealth Bank of Australia (CBA) has had
a pragmatic cloud strategy in place for around
five years as part of its own digital
transformation programme. The original vision
of the then CIO who instigated the change was
to “get out of infrastructure” and into
“components and highly granular data” so the
bank could more readily develop new services
for its customers.”
CBA has been successful in leveraging cloud to
shift focus towards customer engagement.
However, the cost savings alone appear to
provide ample justification for the bank’s shift to
cloud, in support of its digital transformation.
CBA recently revealed that it had been able to
cut its overall IT infrastructure spend by two-
thirds.
A comprehensive digital transformation
strategy incorporates many techniques in
addition to those briefly detailed in this
document. Moreover, a major part of the
journey is the adoption of a digital mindset. Key
to success is the appreciation that such a
programme will involve a fundamental change
of approach, a remodeling of the banking
process map, and potentially, the overall value
chain.
In the face of the digital disruption that is
already occurring in the industry, many banks
are faced with a stark choice. Furthermore, the
decisions taken today about the pace and
direction of travel may ultimately decide the
future of many of the established institutions.
Success or failure, prosperity, or ultimate
decline?
About the author.
Having started his career in the 1980’s in
investment banking, Jon has spent more than 25
years in a variety of research, planning and
strategy roles focusing on the financial services
industry. Based at CSC’s Royal Pavilion,
Aldershot, UK, Jon is responsible for Banking
Strategy within CSC’s ResearchNetwork (part of
the Office of the Chief Technology Officer).