Digital Transformation in Banking: From Divine Loans to Neobanks

in Fintech

The banking industry has come a long way: it experienced revolutions, shifts of paradigm, and loans from Mesopotamian sun-god Shamash (later about it). Currently, it undergoes another revolution, which, most likely, will be a major chapter in the future history books, and will go by the name “Digital Transformation in Banking'', or something like that. In any case, that’s quite an interesting time we’re living in (even ignoring all the other things that are happening in the world at the moment).

So, let’s distract a little from the fuss and challenges of life, push that rewind button and dip our toes in the history of banking. We will see how exactly it unfolded, evolved, and ultimately digitally transformed to the extent that we can pay and take loans from home without leaving the coziness and, quite likely, the anxiety of quarantined self-isolation. Also, we will examine the reluctance of corporate banking giants to undergo digital transformation, what dangers it poses, and how they can make the first steps on the road to the transformation. 

Content:

1. Brief History of Banking
2. Digital Transformation in Banking: Innovations and Struggles
3. Advantages of Digital Transformation in Banking
4. Overcoming Digital Transformation Banking Challenges
5. What Does the Future of Banking Hold?

Brief History of Banking

Fast backward to ancient Babylonia, 1800 BC give or take several hundred years (yeah, no historic accuracy for us here). Imagine you are a farmer named Abum-kila-ilim, and you need a loan because the latest harvest wasn’t spectacular, your livestock is underfed, and you… you’re quite likely underfed as well. Where would you go? That’s right: to the shrine of Shamash, the sun-god and the lord of justice and righteousness! Not the best time to pray, you say? Perhaps, but that’s where you are able to kill two birds with one stone: pray and actually take a loan. Why? Because In Babylonia, the sun-god’s Shrine was a major and the most-respected banking establishment. Moreover, it’s believed that the shrine “was the first bank in the world.”  So, in the shrine, you take your loan in grain, of course, and will have to return it in grain as well. The loan will be documented in a clay tablet as follows: 

“13 gur of grain, interest-bearing — at the rate of ⅓ gur per gur Abum-kima-ilim have borrowed from Shamash and Ur-Kalkal. At harvest time in the payment month, they should measure up [return] the grain and its interest.”

FYI, that’s an actual translation of one of the Babylonian loan tablets that researchers dug up. Looks it something like this, though it's not the same tablet.

Babylonian clay tablet

 

Quite cool, isn’t it? Cool and as unintelligible as some of the modern banking documents. Not much has changed. Also, “⅓  gur per gur” is a 33% interest rate! Chill out Shamash, that’s quite predatory as for the lord of justice. Let’s hope your next harvest will cover the expenses. So, as you see, ancient Babylonians got the concept of loans well.

It’s quite likely that even before the banking shrines, resourceful (and full of resources) individuals in Assyria and Mesopotamia gave grain loans to farmers. We could only guess how they managed risks and ensured that their investments would pay off. We could assume that the collectors of the past were a less considerate bunch and had their methods. Nobody knows for sure though.

For the lack of other historic data, we assume that banking as we know it was born in Mesopotamia.

Our next stop is some 1,000 years closer to AD, when the Greeks and Romans get hold of the cultural reins. The cradle of western civilization makes its updates to the craft of banking. Deposits become a big deal in the Roman Empire: wealthy people consider bank-temples the safest way of storing tinkling coins and other commodities. Also, Romans are keen on accurately recording information on money transfers, including dates. Mediterranean imperialists gave powerful momentum to the bureaucratic engine without even imagining in what a time-hungry monster it would mutate. Later, Romans will separate gods and banking by moving the latter into special buildings. Seems like it'll be quite a blow to the financial prosperity of priests.



Almost one and a half millennia later, we stop to witness the cultural Renaissance coupled with the renaissance of banking. Ambitious Italian entrepreneurs enter the chat, create a lot of ‘noise,’ and change the banking game forever. We are in the XIV century now trying our best to avoid plagues, crusades, and dubious medical advice while powerful Italian families, such as Bardi and Peruzzi, dominate the banking industry. The families open branches of their banks in different parts of Europe and create successful multinational companies. Peruzzi in particular extended their influence from London to Constantinople with 130 departments all over Europe. Fun fact, Italian bank, Banca Monte dei Paschi di Siena (MPS), founded in 1472, is still up and running, which makes it the oldest bank in the world.

And, that’s how the foundation of banking as we know it was built. The centuries ahead are literal history with gradual evolution and implementation of new tools, practices, and propositions. We’re close to the destination point now. It’s the 80s of the previous century, and humanity gets two important things:
- semi publicly-available Internet
- and inspiration for synthwave

People quickly implement the former to connect retailers, suppliers, and customers; while nowadays, we use the latter to create great music to listen to while working.

Retrowave

Some 10 years later, online banking will become a thing and quite a popular one.

We arrive at the 21st century, and it’s about time to shake the foundation and change the way people bank, making the experience more individual, more friendly, and less terrifyingly bureaucratic.

Digital Transformation in Banking: Innovations and Struggle

Currently, the grain loans from the gods are in the distant past, the banking is omnipresent, and paper money is losing its relevance. Now, we are a wannabe-cashless society, and for a solid reason. The user-friendliness and speed of digital banking and peer-to-peer payments (thanks to digital transformation in transaction banking) are understandably seductive. Banking digital transformation is here, and it’s ready to rock the house. However, the transformation is not without bumps, especially for big, established corporate players.

Digital transformation is a complex process that includes end-to-end automation of the business processes, reinvention of a customer journey so it better fits the smoothness of the user-focused digital experience, updating or replacement of the legacy systems, adoption of new long-term strategies. That’s colossal work that requires tech expertise, clear strategic vision, immense management capabilities, bravery, and a bit of luck.

Thus, we’ve entered the era of financial technology. Fintech companies are booming all around the globe, investments in the sector are rising, and people are switching to digital. With convenient and secure apps, we now have fast and cheap international transfers, instantaneous micro-loans from digital banks, and basically all the primary functionality of personal banking a few taps away. As a pleasant bonus, the majority of the interest rates happen to be acceptable. How do you like it, Shamash? 

Now, challenger banks are dictating the rules of the game. Those digital-first or mobile-only companies sharpen their teeth and try their best to bite the biggest chunk of customers off the established banks. In the UK alone, the number of challenger banks measures in dozens, and their customer bases are expected to triple in a year and reach 35 million customers (You can read more about UK fintech disruptors here). And while nimble, adaptive, fintech startups and mobile-only banks, are showing people how banking can and should be, some giants are lagging behind as if a bit reluctant to accept new realities and undergo complete digital transformation.


UK fintech disruptors

In 2017, the Boston Consulting Group conducted a Corporate Banking Executive Survey. According to the survey, 86% of the respondents considered digital transformation in the banking sector a major force that would change the competitive landscape and the business itself. However, only 43% claimed that they have an explicit digital strategy. That’s quite a divide. Nonetheless, rigidness, and the absence of the immediate desire and plan to undergo such a change is understandable. Corporate banks are often humongous, structurally complex, have a long history of successful banking and established practices that drive growth and revenue. There’s not only fear against rapid change but the realization of the investments and effort required to make it. It’s a heavy and potentially dangerous blow to financial stability of any company. However, the benefits of digital transformation in banking are too good to ignore, and the absence of willingness to embrace the transformation is threatening. On top of the danger presented by the challengers and paradigm shift, established banks face declining profits. According to BCS study,

- Traditional banks’ profits shrink: 45% of corporate banking divisions lose revenue (European region banks suffer the most)

- Almost half of the corporate banks have returns below the minimum rate that a company wants to earn when investing

Therefore, the best time to act was yesterday; the second-best time is now.

Advantages of Digital Transformation in Banking

Besides the fact that digital transformation is required to stay competitive in the market where every tech-savvy newcomer wants to win over your customers, there are other advantages of digital transformation in banking.

Cost reduction. Yes, the initial costs of the transformation are staggering. However, the resulting decrease of the overhead costs and increased efficiency of the processes will go a long way and save a lot of money. Also, legacy systems can be costly and cause costly mistakes.

Increased flexibility. Flexibility is rarely a strength of the big and established banks considering the inertia and corporate momentum that propels them forward but makes it hard to make quick turns. A well-tuned software ecosystem in place and focus on change and innovation makes it easier to tackle the banking machinery and add new propositions.

Better customer retention. A focus on smoothness and intuitiveness of a customer journey will increase loyalty of the clients.  

Better connection to corporate clients. A lot of companies that banks work with go digital, and prefer to work with a bank that grants the same level of convenience and flexibility. 

Synchronization. It’s easier to keep different departments synchronized and on the same page regarding important strategic decisions and updates.

Strategic benefit. It’s easier to collect and analyze data, which helps to make informed decisions.

Ability to use cutting-edge tech. Big Data, AI, machine learning, blockchain — you name it. Only a bank that is on top of its digital game will be able to use them efficiently.   

A digitally transformed bank is a bank that is not afraid of change and is sufficiently competitive even in the face of novel ‘dangers.’

Overcoming Digital Transformation Banking Challenges

Digital transformation is here, and it presents great opportunities. However, a lot of banking giants are rather reluctant to start the process because of various reasons, not the last one of which is the complexity of the process. We see five steps required to successfully start the digital transformation and overcome digital transformation banking challenges:

1. Transform corporate culture to transform the establishment

Making changes to a corporate culture and far-reaching goals of a bank to prepare it for the inevitable transformation is a necessary step. Being flexible, adopting a new mindset, and promoting the idea of change on all levels will lay a solid foundation for the transformation.

2. Part with legacy systems

Obsolete and clumsy bank management systems make it hard to make any kind of transformation, especially a digital one. The best solution is to say goodbye to them and invest in a new custom banking management software. Or, if you believe the legacy system is not a 100% legacy and can be redeemed, heavily updating the software is also an option.

3. Create tech and innovation department

Creating a force that will be responsible for managing the process of transformation and ensuring that the bank innovates and stays relevant is required for stability and success of the transformation. A competent CTO backed up by an experienced tech/management team will do the work. 

4. Watch your customers closely

If you want to know what your customers want, observe them, ask them, examine the market and the products they interact with the most and shape your digital transformation strategy accordingly. Put a customer at the heart of the process, and a newly-born banking infrastructure will be reliable and efficient.

5. Invest in a suitable tech team

Digital transformation requires a tech-savvy software development team. You have two options. On one hand, you can gather your own team from scratch. On the other, you can find a nearshore partner who already has a suitable team for you, a well-established process, and oh-so valuable experience. In any case, don’t be afraid to take risks and act unconventionally,

These five steps will lay a solid foundation for further evolution and adaptation to novel circumstances.

What Does the Future of Banking Hold?

Divine loans, Ancient Roman Innovations, Italian banking renaissance, the birth of the Internet and online business, and now — smartphones and ubiquitous infosphere  — the banking industry has had its fair share of twists, turns, and revolutions. It came a long way. Currently, we are witnessing a new crossroads of the industry, or a great filter of banking, if you will. The moments like these decide the future and go into history books. Impact of digital transformation in banking is difficult to overestimate. We believe that some 10-15 years from now, the world of banking will be quite a different place, and the companies that are able to challenge themselves and adapt to the zeitgeist will be the ones who determine this future. Nonetheless, even though the years ahead are surrounded by the veneer of clarity, the future is pretty much a mystery. We will never know for sure how it will come to be, but we can be the ones who help to shape it.

If you think your company is ready for digital transformation, contact us, we believe we can help you. We know how to handle fintech, management systems, and digital transformation for enterprise.