March 2021 | Point of View

Embracing microtransformations: A flexible approach to digital transformation in banking

Digital banking has arrived. But instead of overhauling operations, consider starting with microtransformations instead.

Embracing microtransformations: A flexible approach to digital transformation in banking

The financial services industry has been inundated for years with dialogue around “digital transformation.” There has also been widespread accompanying sentiment that mid-market banks are particularly behind the digital curve. The impact of the COVID-19 pandemic has only more acutely revealed that digital interactions will increase and self-service channels will become the backbone of the industry.

2020 sealed the mid-market’s fate in the need to become digital enterprises. 

Yet, the scope of a broadscale digital transformation, for any bank, is significant—in terms of investment, time, and resources. However, 2020 also taught us that digitizing a bank’s operations to provide robust self-service channels may be more attainable than previously thought.

Over some extraordinary days in March and April 2020, banks across the United States mobilized to accept small business loan applications from their customers under the Paycheck Protection Program (PPP). The short timelines and national pressures of the CARES Act and PPP allowed no margin for delay and forced banks to respond with a degree of agility and speed that many only aspired to previously.

Banks that acted decisively were able to deliver value via digital channels to their customers and communities during a time of great need. Those that took the more traditional path to technology innovation—trying to “perfect” their solutions—often found their customers at the back of the line for critical funding or turning to other institutions.

 

After the first round of PPP stimulus passed and the world settled into the new reality of prolonged pandemic conditions, it became increasingly clear that banks must rapidly digitize their operations and self-service channels to meet market need. 

In our view, 2020 necessitated a new digital implementation playbook—one that flips the old way of thinking about digital transformation and embraces a nimbler, more flexible, less-than-perfect approach to leveraging technology. We think of this new approach as microtransformation— the ability to launch discrete digital capabilities faster while improving the customer experience and maintaining a fidelity to regulatory requirements.  

Begin by embracing a microtransformation mindset using these four principles

A microtransformation mindset is all about achieving “quick wins” that will allow institutions to be flexible and customer-focused by implementing smaller, bite-size technology projects that can have a narrow but measurable impact on the organization. It’s also about fostering rapid user adoption by avoiding massive, multi-faceted transformational projects all at once, which may cause customers to revert to old habits. Like the Agile method, micro-transformations allow institutions to accelerate time- to-value by tackling the highest ROI, least disruptive needs first, then layering on additional features over time. They steadily move the enterprise toward full-fledged digital transformation in manageable, cost-effective stages.

But don’t mistake micro for easy. Getting employees on board with the concept and shifting their respective mindsets as they embark on new behaviors and processes—while shedding long-held institutional practices—through an innovative approach will need to be calculated. These guiding principles offer a way forward for more seamless, efficient microtransformations.  

1. Small moves faster

There’s a tendency in business—especially banking—to try and be perfect. Risk management and compliance considerations drive a desire to see every box checked. The effort involved is such that deployments tend to happen infrequently, typically with many new features consolidated into one “big bang” release.

Here, however, we saw with PPP how a solution can be scoped rationally to meet urgent market needs while still managing risk. This was a textbook example of a minimum viable product (MVP), a solution that delivers the basics but doesn’t necessarily have all of the bells and whistles that stakeholders normally request. Many banks realized that out-of-the-box functionality provided most of what was needed at the time, and that brand and/or technology customization was not essential to meeting the needs of small businesses. Where speed to market was the most important factor, there will be time for customization later as banks “industrialize” or build out these capabilities to their full potential. 

Notably, the concept of “small” applied not only to the scope of the solution but also the size of the team involved. Small, cross-functional teams with a focused and clear vision – and the necessary autonomy – can move faster. They can work in rapid iterations, accelerating progress and learning. People tend to learn better and build “muscle memory” by doing the work in real time versus a training session.

2. The red tape is really caution tape

The PPP effort demonstrated that there is more institutional flexibility than many believed was possible. This is not to discount the importance or influence of regulatory and compliance risk management. That remains key. But in the economic sense, taking a test-and-learn or fail-fast approach can actually be less risky for a bank because it limits wasted resources and allows for assessment of efforts in manageable pieces. Banks are not technology companies, but we now know that some industry leaders are starting to operate that way, even in the community bank space.

3. Customers—and now employees—expect results at a digital pace

The banks that acted fast under this pressure seized an opportunity to build trust and goodwill with customers that will remain throughout and beyond the current crisis. On a broader basis, consumers expect to increase their use of digital baking channels as a result of the pandemic. According to an April 2020 survey by FIS, 45% of those polled said they have permanently changed how they interact with their bank, and 31% of respondents said they will increase their use of online and mobile banking.

Further, bankers and customer representatives felt energized and a sense of satisfaction by being part of the response and by flexing their digital muscles to help small businesses within their geographic reach. They have now seen what is possible and—like customers—will expect even more speed and digital proficiency the next time. 

4. Relax the scope and lower the stakes

For banks adopting a microtransformation mindset, success will be defined differently than in traditional broadscale technology implementations.  The key to a microtransformation mindset is the ability to launch with a product that meets the urgent needs of the bank and its customers—while allowing for the experience to be expanded and perfected over time. Because of this more flexible, iterative approach, defining success requires banks to:

  • Relax the scope: A smaller “MVP” scope is easier and faster to execute. Set your sights on that “full strength” solution once the core elements are proven. Your institution will become better at optimizing and automating once you know what really requires optimizing and automating. 
  • Lower the stakes: Allow teams the space and to explore, experiment, learn, and fail – and, if so, move on quickly to the next idea. This experience is necessary if an entire organization is to embrace rapid implementation. 
  • Emphasize value creation from the start: Demonstrating the ability to create operational and economic value dramatically faster through rapid implementation and innovation will do more than anything else to convince the organization of its efficacy and shift the mindset.

Mobilizing your organization to tackle microtransformations

The benefits of a microtransformation are clear no matter what a bank’s long-term digital goals are. Though day-to-day operations will be narrower, there are overarching factors to keep in mind as you mobilize your organization for these changes. Banks seeking to take a microtransformation approach to becoming a digital organization should consider the following factors: 

Document your digital vision

Executive leadership should work with marketing to understand the future needs of their customers to determine a clear digital vision driving the overall arc of the transformation which empowers the flexible, cross-functional teams to meet these needs through microtransformations. 

Assemble the right team

A cross-functional team brings different perspectives and capabilities to the table to innovate together. The team should have the latitude to operate like an entrepreneurial business with a dedicated senior leader who has full decision rights, a defined but flexible budget, and performance measures to gauge success without stifling innovation.

Only empowered representatives of the most critical stakeholder groups should be involved in leadership and decision-making. However, there should be clearly defined supporting roles for representatives of other groups—IT security, legal, or compliance—who can help clear roadblocks. 

Shuffle the talent

The best people should not always be the same people. Each innovation challenge will have unique needs, so pick talent best suited to the particular task at hand and make the most of the diverse skill sets within your institution. Allow them the space to focus on innovation rather than an ever-growing list of ongoing ownership responsibilities and unnecessary functionality. Once the innovation is up and running, hand it off to others to own, optimize, and evolve. 

Be realistic about required technology

Innovation depends on and uses data. That is enabled by a modern architecture with features such as:

  • Data warehouses and master data management (MDM) that govern and deliver clean, consistent, and quality data 
  • Middleware that makes data accessible while managing risk and minimizing rework 
  • Flexible automation tools such as robotic process automation to facilitate testing without overburdening operations personnel
  • A modern experience layer that offers flexibility and control to try out new concepts without relying on expensive, slow-moving vendors

Some of these features are major investments, and some of them are forms of microtransformations—starting small with pilots in automation or improved data management can build use case by use case to big-picture improvements in architecture and operational flexibility down the line.

Prioritize oversight, approvals, and budgets with a bias for action

Rapid implementation requires competency in agile project management. More importantly, it needs leadership that understands and accepts new flexible approaches. Executives must prioritize and bias toward action, allowing innovation teams the freedom to find their way and self-manage within established parameters that reflect business strategy. Project governance should be “lighter” until an initiative is ready to move to “industrial strength.”

A portfolio-style investment approach can streamline approvals, allowing teams to work without excessive red tape from budgeting or procurement barriers. It is also important to have goals and metrics that promote measured risk-taking and help the bank quickly identify both successes that warrant further scale and failures that can be mitigated with minimal impact to both the innovators and the bank at large. 

Tactical opportunities in the mid-market to promote microtransformations

As we’ve moved into 2021 and even with the promise of a receding pandemic, there are three specific areas that banks must digitize. In other words, for banks that want to compete in a post-COVID 19 environment, there is no turning back. These areas must be digitized and provide clear entry points to test the microtransformation approach.  

  • Customer onboarding

    Across industries, onboarding experiences and capabilities are evolving rapidly – as are consumer expectations. The deposit account opening process is often the customer’s first experience with a bank. To ensure first impressions are consistent with the desired customer experience, you will need to make sure your bank controls this process and can adapt it at will.

  • New digital channel experiences

    Under current contact-less conditions, capabilities such as wires, ACH transactions, automated loan decisioning, loan renewals, and account service requests are essential to remaining connected with and engaging customers wherever they are. As we ease out of the pandemic, banks will continue to rely on digital channels rather than in-branch interactions to grow revenue. 

  • Continuous improvement

    The ability to implement with speed and flexibility is particularly important to continuous improvement efforts, where teams will want to test and prove out concepts with minimal investment whenever possible. The more comfortable your bank becomes with the core concepts of microtransformation, the more it can optimize operations without incurring major financial and personnel costs.

Across industries, onboarding experiences and capabilities are evolving rapidly – as are consumer expectations. The deposit account opening process is often the customer’s first experience with a bank. To ensure first impressions are consistent with the desired customer experience, you will need to make sure your bank controls this process and can adapt it at will.

Under current contact-less conditions, capabilities such as wires, ACH transactions, automated loan decisioning, loan renewals, and account service requests are essential to remaining connected with and engaging customers wherever they are. As we ease out of the pandemic, banks will continue to rely on digital channels rather than in-branch interactions to grow revenue. 

The ability to implement with speed and flexibility is particularly important to continuous improvement efforts, where teams will want to test and prove out concepts with minimal investment whenever possible. The more comfortable your bank becomes with the core concepts of microtransformation, the more it can optimize operations without incurring major financial and personnel costs.

Conclusion

Despite the daunting scope of changes required within the mid-market to become digital enterprises, we believe taking a microtransformation approach to digitizing a bank’s environment is a more viable and realistic path forward.

The impacts of 2020 on customer expectations and interactions with their banks are here to stay. Given the urgency and scope of these new market demands, the old technology playbook needs to be replaced with a newer, more flexible approach that can actually transform an organization. Mid-market banks that embrace microtransformation will continue to outpace their competition. 

 

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