We’ve lived in an era of disruption for nearly 25 years.

The term ‘disruptive innovation’ was coined in 1995 by Harvard Business school professor Clayton Christensen in his book, The Innovator’s Dilemma. Christensen defined the concept as a principle where a dominant product or service provider could be unseated by smaller rivals who have solutions that are simpler or provide the same service at less cost. Disruption has taken place across various industries with financial services being the latest to experience the phenomenon. However, undergoing digital transformation in banking is less about the technology or keeping up with big tech, than it is about creating new value for customers. After all, beyond simply digitizing the goal has always been to maintain and strengthen the relationship between bank and customer. As such, it’s important for organization to keep in mind, as they embark on the digital journey, that technology is merely the vehicle for delivering great customer experiences.

While disruption was groundbreaking in 1995 (and some have suggested that the term be put to rest), the wave of digitalization — where digital technologies have changed a business model — has definitely altered how we interact with service providers. In the 25 years since the term disruption exploded in the tech world, we have seen a volcanic change in new companies that have grown out of the digital era and witnessed how they have shaped our expectation of service.

Napster, the grandfather of disruption, arrived on the scene in 1999 and changed music forever. Metallica launched a lawsuit and music sales declined. However, this also led to the digitization of music, the invention of the iPod and MP3 players and current streaming services such as Spotify and Pandora.

Then there are the companies that dominate certain industries but don’t own relevant equipment or material, yet they hold an outsized influence on our behaviors:

Facebook is the largest media owner, creates no content but has captured consumer attention. According to Accenture, consumers spend 50 minutes a day on their platforms.

Netflix is the largest movie house but doesn’t own cinemas

Uber is the largest taxi company but owns no taxis

AirBnB, the largest accommodation provider, owns no real estate

Skype and WeChat are the largest phone companies, but own no telco infrastructure

What these companies have done is capture the largest market share of their respective industries and heighten consumers’ expectations of personalized, best-in-class interactions and services.

Now the pressure is on for the financial services sector. Not that change is anything new, as evident by the advances in technology over the past 45 years.
The Evolution of Technology in Finance

The pressure now comes from the pace of change. Because, while the advent of these technologies has significantly changed how we bank, when you compare the speed of change between the finance and tech sectors, disruption has been much slower in financial services. There are several reasons for this, which include:


The average age of the top 10 banks in America is 156 years. A century is enough time to dominate the market, establish a banking methodology and, eventually, develop complacency because of a decades’ long lack of competition.


The bigger the bank, the greater the bureaucracy. This red tape has a tendency to slow progress and the ability to respond to shifts in the market, and distract from building differentiating capabilities.


The banking industry is one that is heavily regulated. Ensuring all components of a project are compliant with regulations can bog process and progress.

A History of Paper

Banks used paper before digitalization and converting these assets into digital formats costs time and money, hindering a bank’s ability to be agile.

These factors are a huge disadvantage for financial institutions who are trying to keep pace or catch up to the tech sector. An industry, which unlike financial services, was born out of the digital age and therefore does not face the same legacy problems. This allows them to be more agile when facing challenges or in response to consumer needs.

Falling Behind

Financial institutions have already become dispensable in other parts of the world. In China, citizens have turned to tech companies such as WeChat Pay and Alipay for their financial needs. Banks no longer have face-to-face interactions with customers as the customer experience is now owned by tech companies. Alipay can be used for online or offline purchases and users can get credit that is unavailable from banks. WeChat Pay gives users the ability to send money to each other, even if they don’t have a bank account.

Other countries are following suit with technology such as Google Pay, Apple Pay, and Paypal dominating. This is because, as current data suggests, banks are losing business due to a lack of personalization. Of those surveyed, 42% left their primary bank for a competitor because they either saw or received an offer. 50% said they would have purchased from their primary bank if the same offer had been extended. This mentality is opening doors for big companies like Amazon, which already dominates the buying cycle, who have already had talks with several financial institutions such as JP Morgan to provide checking accounts to retail customers. Bain and Co estimates that should that happen, Amazon would have 70 million banking customers within a five-year period, equal to the number of clients of Wells Fargo, the third largest bank in the US.

The Current State Of The Industry

Many banks have begun to shift towards digital. Some have chosen the M&A route by buying up fintech companies. In the last five years, there have been 81 deals, worth about $4.1 billion US in active funding. One of the biggest banks, JP Morgan, invested 10% ($10.8 billion US) of its 2018 budget into fintech, a figure more commonly seen in technology companies. This may sound impressive but consider that Amazon’s R&D spending in 2017 was 12.6% of revenue, which was $232.9 billion US.

Understanding Digital Transformation

Fintech is filling the technology gap left open by banks but, unlike big tech and fintech, financial institutions have the first-mover advantage due to their established history and long-standing customer relationships.

But before the financial industry leaps into digital transformation, there must be an understanding of why it’s imperative. Instead of trying to stop the customer drain and churn, financial institutions should acknowledge and address what customers desire and answer that with personalization. This is backed by data on search behavior, which found an 80% increase in “best” mobile searches, a 3X increase in mobile searches for “near me,” and more than 300% growth in search interest for “open now” in the past two years.

This shows a growing appetite for more convenient and relevant options, and in response digital-first banks have begun popping up. In fact, digital-first banks are already outperforming traditional bricks-and-mortar banks in customer satisfaction. That means digitalization is not an option, it’s a necessity to keep and gain customer loyalty.

However, it’s no longer enough to have an app where you can just pay bills or transfer money. Financial institutions need to internalize customers’ lifestyles and expectations and be where the customer is. Customers are no longer willing to conform to a financial institution’s schedule, so they must now provide the level of service customers have come to expect and deliver it when and where they need it. If they don’t, they risk losing customers to fintech and big tech players. Think of it as cutting the cord with cable and choosing between Netflix, Hulu, Amazon and Prime.

What Is Personalization Today?

What it isn’t is a happy birthday message on an ATM screen or via a push notification on their phone. While this might seem cute, it’s irrelevant if it occurs without understanding and addressing their needs. Personalization is about solving customer problems by helping them achieve their goals. Part of that is understanding a customer’s life stage and goals, such as whether they have student loans, are hoping to buy their first (or last) house or what their retirement plans are.

Purchase behavior and expectations are affected by forces outside the financial industry thanks to companies like Facebook, Amazon, and Google, who all use data, analytics and digital technology to create personal experiences.

In The Age of Surveillance Capitalism, author Shoshana Zuboff writes, “Where marketers in the past gathered data to match products to customers, Google, Facebook and other internet platforms use data to influence or manipulate users in ways that create economic value for the platform, but not necessarily for the users themselves. In the context of these platforms, users are not the customer. They are not even the product. They are more like fuel.”

Customers may be the fuel for financial institutions but if banks don’t meet customers’ needs with personalized products and services they’ll face a slow extinction. Because, in the end, customers will go elsewhere to find what they want. They are embracing technologies like voice-activated devices such as Alexa and Google Home, shopping via mobile devices and making purchases from targeted and personalized search results because they integrate into their lives and make mundane, necessary tasks easier and more convenient.

These are concepts that have been driven by retailers and while banks aren’t retail stores, they also have products they want to sell to current and potential customers. This means banks can and should learn from retailers to:

Lead in the peer-to-peer arena, where fintechs like Venmo and Cash App are already synonymous with easy, quick money transfers between users.
Leverage multiple channels to help the customer make their purchase decision or seek a resolution to an issue.

Reduce friction in the purchasing decision. Making a purchase from a bank can be long, tedious and filled with paperwork. While it can’t be fully eliminated, financial institutions should examine ways to reduce the friction and frustration inherent in the process.

Work on the customer’s hours, not banking hours. Consumers make decisions on their own schedule and financial institutions that don’t adjust accordingly will lose them. With fintech companies offering robo advisors, easy-to-use money management applications and real-time and 24-hour services, customers are turning away from banks that close their doors at 5 or even 8 p.m.

Financial institutions have the opportunity to use data and contextual intelligence to provide real-time experiences for their customers. Imagine if a customer has been at an airport for longer than 30 minutes and currently does not have travel insurance. A bank could help the traveler get coverage quickly and seamlessly before he or she departs. Or, a bank could recommend a customer with a consistently positive balance to open an investment account and educate them on how to best manage their investments. These use cases can be enhanced even further by understanding the contextual situation their customers are in, such as whether they’re driving, if their device battery is low, or if they’re at work or home. This addresses a customer’s need at the right time when they can focus their attention. It’s no longer about selling products. Instead, it’s about fulfilling needs, solving problems and evoking positive emotions.

Common Obstacles To Digitalization

When it comes to implementing new and innovative solutions, industries always run into obstacles and financial services is no exception. Some of the most prevalent pain points financial institutions have experienced include:
A bank’s legacy can also extend to rigid technology that is limited to executing on a small number of use cases for more traditional lines of business. There is a lack of flexibility with new business lines and unrealized growth. This rigidity also extends to mindset. Typically, banks aren’t a hub of innovation and entrepreneurship, and often don’t encourage this thinking. Creating a non-siloed unit to strategize and implement new use cases across lines of business in conjunction with new technology can minimize the effect of legacy thinking.

It’s important to note, however, that in recent years banks have made headway in breaking down silos and legacy thinking by opening innovation labs within their organizations. SunTrust opened its Accelerator Studio, a dedicated space for teams to come together to collaborate on specific projects in 2017, and Wells Fargo’s Digital Labs offers a place where the bank can research, develop, and test forward-thinking ideas that will benefit Wells customer across all lines of business within the bank.
Part of the reason financial institutions lack agility and innovation is because they have to navigate very stringent regulatory systems and privacy regulations. Digital solutions need to adhere and support these regulations.

Customers are very concerned about privacy and how their data is used, as seen with the multiple Facebook breaches. Financial institutions must support existing regulations such as Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA), the EU’s General Data Protection Regulation (GDPR) and the The California Consumer Privacy Act (CCPA) which was modelled after the GDPR, signed into law in 2018 but doesn’t go into effect until 2020. These regulations protect an individual’s data and privacy.

While the previous pain points are important and need to be addressed on the path to digitalization, aggregating data is key to successful transformation. Without it, financial institutions can’t meet or exceed customer expectations for personalization. Think how many times you’ve called your bank and been told by the person on the phone or in chat that they can’t access your data or that you need to be transferred to another department. It’s frustrating and indicative of a lack of data readiness needed to address customer expectations. Siloed data is a result of the legacy practice of having multiple software systems at different junctures in time, for different departments, which do not speak to each other.

With the decision to source and implement a fully comprehensive system, implementation costs can run into the millions, especially if system features include AI and IoT. Hiring people to implement and manage the system is also very expensive. The process can be momentous and disruptive. Partnering with a fintech company that has the infrastructure and expertise can keep costs manageable with minimal downtime.
Most traditional financial institutions have multiple specialized digital legacy systems per department that are often proprietary as well as decades old. They may work fine and do their job but these systems are typically outdated, have siloed data input and output systems and can’t communicate with other systems, internally or externally. These outdated systems need to be upgraded to meet the challenges of the market, face competitors, effectively harness data and address customer needs. For many financial institutions, this often means starting from scratch by sourcing a fully comprehensive system that can do all of the above instead of continuing to create a technological pastiche.

Another issue is that financial institutions tend to be risk-averse, which is good when handling money but not good when selecting and implementing new technology. The default is to choose the basics which can do the job immediately but often won’t be able to scale in the future. Financial institutions should be open to new vendors and companies who can partner with them on true digital transformation.
When you can order something from Amazon and get it the next day, dealing with financial institutions can feel like it takes forever. financial institutions know the customer has changed but they take so long to evolve new products that by the time they launch, the customer has changed again. TTM can be shortened drastically when banks leverage technology (as discussed above) and data analytics. Technology allows them to test, learn and optimize sales and marketing, and data analytics takes that information and uses it to identify new prospects, uncover customer needs and recognize sales opportunities. Creating a funnel that integrates sales, marketing, data collection, analytics, and targeting can shorten the time to market and lets financial institutions capitalize on their wealth of data. While parts of the cycle can’t be shortened due to regulatory and legal compliance, other areas should be reassessed. ​

To combat these challenges, banks need a data strategy that is woven through every relevant area of business, taking into account privacy and legislation.

Financial institutions have an advantage with data: they have a lot of it when it comes to their customers. Leveraging that data means having a comprehensive data strategy in place with a method to gather all proprietary data in one secure place and augment it with partner or third party data that can be used to better understand their customers. A properly defined and accessible data ecology will not only allow banks to orchestrate but will also set the foundation it needs to implement future AI capabilities.

Changing Mindset

Addressing personalization also requires a change in mindset. Financial institutions need to understand that personalization isn’t a side project. There needs to be a shift from traditional lines of services, products and marketing because using old techniques for new technologies is destined to fail. Institutions should create a business model that addresses new technologies with new marketing to get measurable results.

These pain points cannot be treated in a vacuum. As we’ve seen, a full digital transformation means breaking down the silos between departments, technologies, and mindsets.

Fintech Is Not The Bad Guy

Despite popular belief, it’s not fintech who poses a threat to the financial services sector but big tech such as Google, Amazon, Facebook, and Apple (GAFA). This is because GAFA with its existing influence, data and customer base has an ability unlike fintech to scale quickly. With this, big tech companies could potentially launch a financial product to millions of users in an instance, where as fintechs — even with a outstanding product — would still need to acquire new users first.

Organizations looking to update their digital products should partner with fintech companies to fill their technological gaps and combat big tech. Financial institutions benefit from decades of customer data. To succeed in the future they should find partners who are flexible and agile, understand and can help solve any pain points, can address any use case and, most importantly, are as dedicated as they are when it comes to delivering great customer experiences.

Next Steps

Banks are undergoing digital transformation to stay competitive, maintain relevance and meet customer expectations. As big techs and fintechs shake up the finance space by offering new products and services, banks who wish to compete must lead the revolution instead of relying primarily on incremental changes.

For example, embracing chatbots, robo advisors and personal finance managers are good ideas but they don’t lead to greater innovative advances. Many of these services overlap in features and functionality and, while they do focus on specific customer needs, they fail to deliver a truly differentiated personalized experience. Banks need to create strategic customer-centric approaches that are tool-agnostic to revolutionize how they embed themselves in the lives of their customers.

This approach will allow financial institutions to maintain:

Competition from big tech can carve market share away from financial institutions. This shift in business will help keep competition at bay.

Creating hyper-personalized services and products opens up new markets and business models for sales and marketing.

Implementing a strong digital transformation initiative, accompanied by connected data and advanced customer service, will help financial institutions maintain relevance with new generations of banking customers from millennials to Gen Z. Organizations that can achieve this will stay top of mind for all their lifestyle banking needs.

At the core of digitalization is delivering better customer experiences. Customers want on-demand control over their finances and financial decisions. They expect it to be effortless and integrated into their lives and activities. In other words, they don’t want to stop what they’re doing to ‘deal’ with financial issues. In fact, they are becoming increasingly accustomed to information and services being readily available.

It’s imperative that banks take into account these customer desires when creating new business strategies. Understanding that if these expectations are not met, customers will look to fulfill their needs elsewhere. The key is to look past traditional lines of service and find new, revolutionary ways to embed themselves into the lives of their customers via advanced personalization and next-level experiences they crave.