For Banks, A Digital World Demands Digital Processes

Technology and Digital

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July 26, 2018

Business terms are nothing if not sometimes confusing. Take the terms “digital,” “digital transformation (aka digitalization),” and “digitization,” what are the differences between these terms, and are the differences important to banks? According to MIT’s Sloan School of Management, “digital” refers to a host of technologies that include, social, mobile, cloud, and IoT, whereas “digital transformation”, or “digitalization” refers to a re-think of a company’s value proposition, delivering enhanced products, services, and customer engagement. That leaves the term “digitization:” a term which MIT defines as redesigning and standardizing digitally-enabled business processes to achieve cost-cutting and operational excellence.

Banks have been actively engaged with “digital” for years and recently, many have at least begun an effort toward “digital transformation” (arguably with sometimes mixed results), but MIT’s research has shown that over a 20-year time span, only 28 percent of established companies have successfully digitized. Undoubtedly, many banks are a part of the 72 percent of companies that have digitization opportunities.

There is a reason that 72 percent of companies fail to successfully digitize operations and achieve related cost-cutting efficiencies; breaking old habits can be tough, especially for highly-regulated, generally conservative banks. Many banks embark on a digital transformation strategy and invest heavily in the customer-facing digital front-end side of the effort, but fail to recognize the full potential for efficiencies and differentiation offered when work is reengineered as a part of digitization.

An example may help illustrate a common digital transformation challenge. A bank decided to make one of its lending businesses “digital.” The bank’s CLO and CIO partnered to develop a digital front-end to allow customers to apply for a loan using either a mobile-smartphone, a tablet, or a computer. The application process leveraged automation that prefilled data and shortened the application process by over 50 percent. The bank integrated the loan digital application into its existing Loan Origination System (LOS) and allowed its existing fulfillment processes to take the loan through to funding. Initial testing showed a very positive customer experience, and soon the bank saw volume increases through the new digital channel increase. Both the CLO and CIO were pleased with the bank’s process and considered the work to be a step toward its broader digital transformation. As time passed, the CLO noticed with some concern that while the digital application had helped improve the application process, not much else had changed.  The bank’s total loan processing time had improved only slightly, and the same bottlenecks and customer frustrations that existed with the old desktop application process remained largely unchanged. The CLO asked the CIO where all of the benefits of digitization had gone? The bank was clearly in the “72 percent-club.” What went wrong, and where did the digitization benefits go?

The bank’s mistake was in not truly digitizing operations (in this case, Loan Fulfillment). The bank’s new digital application allowed the work to be reimagined, to fundamentally change the way the work was completed; but, by leveraging the existing infrastructure, the bank essentially forced the work back onto its existing process path. True digitization demands that a start-to-finish process be considered that takes advantage of digital capabilities. Work no longer needs to be completed using a “serial process design” of 1) processor, 2) underwriter, 3) funding; instead, digitization enables potential parallel process designs that change the work completed by a processor and accelerate the work completed by underwriting. True digitization of bank processes starts by understanding what minimum information is needed (in this case to progress a loan through to funding), and when that information is (digitally) available.  Using these basic design elements, process redesigns may occur that better fit a process to digital capabilities, versus fitting digital input to existing process limitations.

Digitization of operational processes is an essential element of any digital transformation. Failure to digitize processes will limit any bank’s ability to deliver on an overall digital transformation promise. To realize cost-savings, efficiencies, and digital differentiation, operational digitization can no longer be an after-thought in bank digital efforts. Digitization must cut through any digital-definition confusion and be recognized a key enabler of success.

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