Banking industry accelerates digitalisation by five years

During the pandemic, banks underwent a rapid digital adoption process, with 89 per cent accelerating their implementation of technology by five years. According to research by SAS, the leader in analytics, a mixture of UK challenger and traditional banks were surveyed about how their IT infrastructure, processes and priorities have changed during the pandemic.

With 93 per cent accelerating their digital adoption by five years, traditional banks have overseen a particularly marked rise in the adoption of new technologies, compared to 87 per cent of challenger banks. Such a drastic technological shift has led the vast majority (87 per cent) of banks to believe that traditional banks are now more competitive.

Same technology, different priorities

Due to their newfound competitivity, four-fifths (84%) of banks were confident that traditional banks would press ahead with digital adoption and not revert to type once the pandemic subsides. Despite this, there was little belief that this would sway the current trajectory of challenger banks; nine-in-10 respondents disagreed with the notion that challenger banks would now need to find a new platform from which to compete with traditional banks.

Instead, through increased automation, challenger banks have set themselves an ambitious target of achieving a cost-to-income ratio of 35 per cent by 2023. In comparison, traditional banks will be targeting a ratio of 47 per cent.

Their priorities differ when it comes to how traditional and challenger banks will use technology. For example, two-thirds (65 per cent) of challenger banks saw offering their customers a more personalised service as a key point of differentiation, compared to just half (53 per cent) of traditional banks. Meanwhile, a further two-thirds (65 per cent) of challenger banks saw being data-driven as a competitive advantage, compared to just a third (33 per cent) of traditional banks.

Despite this relatively low interest in being data-driven, more than half (53 per cent) of traditional banks recognised the use of artificial intelligence and machine learning as areas where they can get a competitive edge, compared to 39 per cent of challenger banks. Linked to this is the fact that four-fifths (83 per cent) of all respondents agreed that investment in data analytics over the next three-to-five years would be “significant”, the strongest of the response options available.

Johnny Steele, Head of Banking, SAS UK & Ireland, said:

“While traditional and challenger banks have accelerated their adoption of technology rapidly during the pandemic, their priorities remain broadly the same. In essence, as things stand, they will be using the new technology to double down on their pre-existing competitive advantages.

“However, this is an opportunity for banks to innovate in a different way. Traditional banks, for example, can use their deep resources to provide a broad portfolio of services to their customers, as 13 per cent are already prioritising. At the same time, though, through cloud-based advanced analytics, traditional banks can ensure that these new services, and the ones they already have on offer, are deeply personalised and easy to use. This means being able to complete banking processes almost entirely online, without having to go in-branch or speak to someone on the phone. Increasingly, this is what customers demand from their bank. Therefore, whether it’s challenger or traditional banks, it’s crucial that they can offer a frictionless service which is also fairer and simpler for their customers."

Reaching out for a helping hand

Banks will have to increasingly manage data workloads via the cloud to get full value from the technologies they have adopted. However, three-fifths (61 per cent) of banks cited security and compliance concerns as a key inhibitor to cloud adoption. Meanwhile, a large majority (87 per cent) of traditional banks called out legacy system integration as the main barrier.

Despite these barriers to cloud adoption, 91 per cent of challenger banks selected technology innovation as the most important factor when choosing applications to support the core banking system, followed by improved security and better data management. For traditional banks the results were similar, but improved security and better data management were ranked slightly higher than technology innovation. 

To help address these challenges, banks are beginning to show an increased willingness to outsource the management of back-end processes, not only to meet goals quickly but to absorb third party industry expertise to enhance their own skill sets. Sixty-three per cent are now either fully or partially outsourcing their customer relationship processes (CRP) to third parties. This is expected to rise to 87 per cent in the next three years. Meanwhile, 84 per cent are already doing the same for their anti-money laundering processes. Overall, nine in 10 banks (89%) plan to focus on more third party solutions to drive innovation once the pandemic subsides.