Digital Transformation in the Canadian Banking Sector

March 14, 2021

Digital Transformation has become a buzzword over the last few years, and conversations on the subject have only increased following the COVID-19 pandemic. As organizations across sectors rush to adjust and evolve based on recent changes in consumer behavior and remote working, digital transformation is viewed as something of a magic wand to “fix” problems, increase business efficiency, and help organizations better serve their customers.

The Canadian banking sector was an early adopter of digital technology compared to many other industries. With the objective of offering their customers flexibility, banks enhanced their digital capabilities and developed an extensive payments ecosystem, supported by versatile online banking platforms and mobile apps. Many banks also partnered with Financial Technology (Fintech) players to deliver personalized experiences, added security, digital lending, and other capabilities in the retail and small business segment. For the most part, however, the digital technology that banks had embraced was customer-facing and did little to modernize their back-office processes. In other words, the digital adoption, while forward-looking, was not “transformative”.

According to a pre-COVID survey by Broadridge, 37% of financial services professionals rated their organizations’ digital transformation efforts as “C” or below, even though 82% stated that it was a high priority.

Following the pandemic, efforts towards digital transformation accelerated and a significant portion of back-office processes were automated, as organizations continued to strive to provide a seamless, fast, virtual customer experience. In many cases, change happened overnight to ensure business continuity in the face of lockdowns and remote working requirements.

Roadblocks in Banks’ Digital Transformation Journey

Looking back at bank’s foray into digitization, it is amply clear that banks have invested significantly in modernization over the years. Why then have they failed to meet their digital transformation goals?

The first roadblock, undoubtedly, has been the lack of a clear strategy or well-defined roadmaps. Most Canadian banks approached their digital transformation opportunistically, based on ad-hoc requirements and executive initiative. In the absence of a clear digital roadmap, these initiatives often failed to align with the larger organizational strategy, goals, and KPIs. While some initiatives did deliver value, in many cases, that value was short-lived or the solution merely patch-fixed a larger underlying issue. However, this has started to change, and many Canadian banks are now aligning their digital strategy with the organizational strategy, so resources can be put behind initiatives that will provide measurable, consistent, long-term value.

Another obstacle is the enormous volume of legacy technologies that the banks already own. In the last 5 decades, banks have spent almost 15% of their revenues on adopting “modern” technology. Many now find themselves weighed down by near-obsolete legacy systems that are costly to maintain and not as efficient as newer systems available in the market. Modernizing all of that legacy technology, in a relatively short period of time, will undoubtedly be a costly affair, and banks will need to carefully prioritize their modernization efforts based on expected return on investment. In theory, analytics could help with this prioritization, but since most banks are in the initial stages of their digital transformation journey, there might not be enough data to train models to accurately predict ROI. The quality of available data, too, is in question, as banks have thus far been hesitant to invest in data governance, and analytical results may not be trustworthy.

The next roadblock has been one of inertia. The Canadian banking system is fairly protected, and most banks have a high rate of customer satisfaction. This left banks with little incentive to change, and as was the case in many sectors, there were fears associated with breaking the status quo and drastically changing established ways of working. In the last few years, however, the industry has been facing increasing domestic competition from Credit Unions, and the need to increase efficiencies, expand – or at least retain – market share, and continue to deliver on customer expectations, has spurred innovation and digital transformation. With Open Banking on the horizon, the financial playing field is expected to become even more competitive, with customers having unprecedented flexibility to choose from a wide range of product and service options. These changes in market environment will likely lead to greater momentum and willingness among banks to embrace transformational change.

Another challenge faced by banks was the limited ability to use customer data. Advancement of, and in many cases, even the inception of digital capabilities is based on analytical insights from customer data. Unlike the EU, where GDPR directs how customer data can be used, Canada did not have clear regulations for data privacy and protection (apart from PIPEDA, which focuses more on what cannot be done with data, rather than what can). With the passing of Bill C-11 into law, Canadian banks will have more clarity on the use and protection of customer data. This will allow them to have a clearer picture of their customers, and they will soon be able to look at their data differently and extract valuable insights to drive their businesses forward.

The relatively small size of Canadian banking sector, too, posed a challenge. Typically, digital transformation is driven by competition and market forces, but with only a few players leading the market, there was very little cross-pollination of ideas and the pace of innovation was slow. Moreover, there was little collaborative brainstorming, and consequently, no clear industry standards or best practices for digital transformation emerged. With players operating in silos, each following their own ad-hoc plan, there was no sectoral “leap” on the digital transformation front. Even now, there is a lack of clarity on the scope and possibilities of digital transformation, and what constitutes transformation.

The Foundations of Digital Transformation in Banking

Taking cognizance of the unstructured way in which Canadian banks have been approaching digital transformation, Adastra’s experts have studied the industry’s efforts and their impact over the years and drawn from the experience of the banking sector in other countries to chart out the building blocks for digital transformation in the banking sector. This list is by no means an exhaustive one, and many banks may already have implemented some of these aspects. However, implemented together, these elements can deliver a truly transformative change for banks and their customers alike.

Shift to mobile and online banking: Most banks were forced to change their mode of operation almost overnight to prioritize mobile/online banking when the pandemic first hit. Customer traffic shifted from branch/telephone/ATM to virtual channels, and banks had to act quickly to manage changing customer volumes and deliver continued service. We foresee this change in customer behavior to be relatively permanent, and while physical branches will not be obsolete any time soon, banks will need to ensure they are able to onboard their customers virtually and provide the expected level of customer service.

VR banking platforms: The branch of the future is a virtual-reality (VR) platform that allows customers to do their banking online, but also offers them the personal contact they sometimes crave. VR banking platforms can simulate the physical banking environment, complete with interactive screens, digital presentation rooms, virtual guides, and live text/voice chat. The platforms also allow for one-to-one digital meetings and document verification, so representatives can give customers personalized advice, sell services, and onboard new customers.

Fully automated, electronic customer-facing processes: Seamless customer service is one of the primary objectives of digital transformation, and banks should endeavor to ensure all customer-facing processes, ranging from customer onboarding, payments activities, to service and support, can be effectively delivered in an electronic manner. Automation of call centers to reduce reliance on humans and customer support via chatbots are a few of the initiatives that banks can explore to this end.

Intelligent automation of back-office processes: Many back-office processes like document processing, data mining, adjudication, and fulfillment still rely on humans, and are consequently, time consuming and error prone. Robotic process automation (RPA) can reduce manual involvement for simple, repetitive tasks, and for more complex processes like document processing, RPA can be augmented with AI to deliver enhanced efficiencies.

Data-backed decision-making: There is enormous potential for the use of AI and analytics for decision-making, and with adequate data governance measures in place, banks could leverage data to extract valuable insights. Explainable AI models can be used to strengthen fraud detection, credit decisioning capabilities, and can also help banks make informed decisions about their product/services mix.

Facilitation of easy, real-time P2P and P2B payments: Payments modernization can transform financial institutions’ existing systems to allow for fast, flexible, and secure transactions. Banks can adopt different solutions to improve payments accuracy and interoperability to deliver better customer service. ISO20022 compatibility can also facilitate data-rich transactions, making it easier for business customers to track cross-border payments, match payments to invoices, and improve their financial oversight.

Cloud as an enabler of the above: Digital transformation initiatives require a modern architecture to support and enable them. Compared to on-premise legacy systems, the Cloud offers greater flexibility, scalability, and speed-to-market. Moreover, Cloud platforms provide organizations a wide range of tools for analytics and business intelligence, and an increasing number of financial institutions have been migrating to the Cloud to unlock greater business value.

Adastra has 20+ years of experience in supporting financial institutions on their digital transformation journey. We have a strong track record of delivering improved business and customer outcomes by creating frictionless interactions across your systems and processes. Our experts can help you create and implement a roadmap that will transform both your customer journey, as well as your back-office processes to align with your organization’s goals.

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Ilia Bolotine, EVP, Solution Delivery and Business Consulting

Ilia Bolotine

EVP, Solution Delivery and Business Consulting

Multi-faceted IT leader who utilizes innovative methodologies to transform processes and teams into world-class performers

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