Technological Thoughts by Jerome Kehrli

The Digitalization - Challenge and opportunities for financial institutions

by Jerome Kehrli

Posted on Tuesday Mar 21, 2017 at 09:52PM in General

A few weeks ago, I did a speech about the Digitalization and its impact on financial institutions, both in terms of challenges and opportunities in the context of my role as Head of R&D in my current company.
I am reporting here my speech as an article.

Even though the Digitalization and its impacts is something so widely discussed and studied nowadays, even in banking institutions, I still find it puzzling that so many of them struggle following the pace.
Having said that, many others on the other hand have well understood how much technology is about to disrupt the banking business just as Uber has disrupted the transportation business and AirBnB the lodging business and many good and enlightening initiatives start to flourish in the news.

But still, it seems to me that most innovations in banking are really coming from small players or even startups - think of fintechs - instead of coming from the big players of the banking industry. For instance, paying everything with a cellphone is a thing for a few years now in many African countries while it's not at all in Europe, even in Switzerland, THE country of banking.
Especially in Switzerland, financial institutions struggle keeping up with evolution of their business coming from the digitalization on one side and the regulatory pressure as well as the reduction of the margins on the other side.
Discussing this very matter further exceeds the scope of this article of course but I want to report below my speech notes and present what I see as the most important challenges and opportunities for the banking industry coming from the digitalization.

Part of this article is available as a slideshare presentation here:


1. Introduction

1.1 An evolving society

Our society is evolving.

Yesterday - in 2008, we were amazed by the first smartphones. Today they have almost become a part of ourselves. We cannot go without them anymore.

Today everybody has in his pocket a computer that is more powerful by several order of magnitudes that the computer that sent the first people to the moon.
Later, 30 years ago, we had computers still way less powerful than an iPhone that were fitting an entire room, today an iPhone stands in our pocket.

Is it the biggest invention of the decade? Likely, but the previous decade, not the current one. I'll get back to that.

Nowadays, new technologies emerge first in the consumer market and then spread into business. New solutions emerge every month and corporations cannot keep up the pace.
This new reality has a name: it's the consumerization.

The consumerization has a consequence. Increasingly, the trend is to hire employees with their devices and applications. This is the BYOD for "Bring Your Own Device" trend. It comes from the fact that employees are more comfortable and more efficient with their own devices.

The direct consequence of the consumerization is a use of a mix of professional and personal tools by employees (Office Suite, Gmail, Google+, Twitter, Facebook, Dropbox, Evernote, ...)
Nowadays many companies are still blocking access to these personal tools from their employees, mostly financial institutions I have to say.
Tomorrow, that won't be possible anymore.

People are used to be connected all the time, with highly efficient devices on highly responsive services, everywhere and for every possible need.

1.2 Some Facts

Global sales of PCs never really exploded.
On the other hand, Global sales of smartphones and tablets explodes.

Global Mobile traffic went from 1% in 2009 to 4% in 2010 and 12% in 2012. Today it reaches 40%. In 2020, Global Mobile Traffic will exceed fix PCs Internet Traffic.

This may be hard to understand for people in Europe or the US for instance. But look at India for instance: the wired telecommunication infrastructure there could never be developed as it could be in Europe or in the US. There, the mobile traffic already exceeded the Desktop traffic in 2012.

Global sales of smartphones and tablets has exploded!

In 2017, over 3 billion people will be connected all the time, everywhere and for every kind of needs.

1.3 More Facts

We look at our smartphones 150 times a day.
We are using our smartphones all the time, even when watching another media.

Even when watching TV, we cannot refrain from using a connected device at the same time, either a smartphone or a tablet.

As a funny note, men and women are using their smartphone or tablet while watching TV for significantly similar reasons.
But there are 2 exceptions:

  • Looking at sport results on an iPad while watching TV seems to be rather a man thing.
  • On the other hand, looking at Facebook feeds while watching TV seems to be rather a woman thing.

1.4 Today

I cannot stress enough how much what we are experiencing from a few years is important and what it means in terms of change of society.

Today, we are inter-connected on different kind of medias, during a continuous time and for every possible need. This has become a part of the human behaviour. In a few years (OK maybe a little more) the majority of the workforce will be composed by millennials, by people almost born with an iPhone.
At that moment, exchanging data on Internet all the time and for every possible need will seem to people to be as natural as breathing.

But this is today ...

1.5 Tomorrow

Tomorrow there will be dozens of billions of additional sources, in the form of smart devices connected on internet and exchanging data.

The Internet of Things - or IoT - refers to "uniquely identifiable objects and their interconnection on internet, as well as their automatic exchange of information with third party services".

Dr. Henrik Christensen, Professor of Computer Science and the Chair of Robotics at the Georgia Institute of Technology, said, not long ago: "My current prediction is that kids born today will never have to drive a car".

There are 3 billion people connected in 2017 and exchanging data on Internet.
Gartner thinks there will be 26 billion devices on the Internet of Things by 2020.
ABI Research is even more optimistic and claims that 30 billion devices will be wirelessly connected to the Internet of Things by 2020.

The internet of things is the coming big thing!

The "internet of people" and the "Internet of Things" form the "Internet of Everything".

Cisco defines the Internet of Everything (IoE) as follows "The Internet of Everything brings together people, process, data, and things to make networked connections more relevant and valuable than ever before-turning information into actions that create new capabilities, richer experiences, and unprecedented economic."

The Internet of Everything is the coming evolution from the interconnection of people and objects, always, all the time, everywhere and for every possible need.

1.6 Big Data

Since we started estimating and measuring the amount of produced data until 2003, 5 exabytes (5 billions gigabytes) have been produced.
In 2011, this quantity was generated in 2 days (think of facebook, twitter, google search logs, financial transaction logs, etc.).
In 2014, this quantity is generated in 10 minutes.
Today it is likely generated in a few minutes.

Not only do we generate more and more data but today, thanks to Big Data technologies, we have the means and the technology to analyze, exploit and mine this data to extract meaningful business insights

The data generated by the company's own systems, such as logs, user and customer activity tails, etc. can be a very interesting source of information regarding customer behaviours, profiles, trends, desires, etc.
But Big Data becomes really relevant only when one also considers the data external to the corporation, such as facebook status feeds, twitter logs, linkedin news, etc.

Today, a whole lot of additional sources are available to corporations to gather business insights related to market trends.

1.7 Digitalization

To summarize. what we are experiencing today:

  • the digitalization of the masses,
  • the era of power,
  • the availability of massive amount of data,
  • more importantly, the ability to analyze and use this data,
  • the always and everywhere interconnection of people,
  • the internet of things and
  • the coming internet of everything,

must lead corporation to adapt.

The digitalization urges corporations to
search for new business models and
rethink their operating model

2. Financial Services ARE impacted !

Now when I run this speech in financial institutions, it happens sometimes that I hear comments such as "Yeah, well, all of this makes surely a lot of sense for fancy internet companies. But we're a bank here. We're doing serious business, we're not Facebook."

I'm always puzzled by this kind of reactions because in my opinion, serious businesses such as banking institutions are in contrary on the front line when it comes to meeting the digitalization challenges.
It's now wonder fintechs have become such a thing and are increasingly eating the banking business.

Think of millennials, think of these people that are almost born with a tablet or a smartphone in their hands.
My father, used to go to the banking institutions that was closest from where he lived and where he worked. That's how he made his choice.
I myself, I have chosen my banking institutions at the time I was a student. My choice was driven by the conditions that banks were giving to students, such as a free credit card, no additional costs, etc. Then I simply remain loyal to my first choice.
Millennials choice will be different. They will choose the bank that provides them with the best online experience. That will be their main driver. For these people born with twitter, facebook and all these fancy online services, it will simply seem impossible to have to physically go to a branch to perform whatever operation they will need related to their banking account, including its initial opening.

Let me give you some examples ...

2.1 The rise of Mobile Banking

Only twenty years ago, we had to move to a physical location - a branch - to perform any kind of financial transaction, such as simply paying a phone bill.
What is the situation today?

Wells Fargo announced plans earlier this year to close over 400 branches in the US. The tendency of big financial institutions is to close physical branches at an unprecedented pace, as a reflection of people's preferences for online and mobile banking.

In online banking there is also a clear tendency from 2012 onward. Mobile banking usage skyrocks while fixed Internet banking is stagnating or even slightly shrinking.

On one hand, rising compliance costs and restrictive regulations is the new normal. This forces banks to increase operational efficiency at all costs, which is pretty difficult when regulation related costs tend to explode.
On the other hand, reduced margins and increased costs is forcing banking institutions to adapt. Growing the Investment management business line is a relevant approach of course but diversifying earnings with new retail banking initiatives aimed at ensuring a first place on the online banking market is mandatory.

The digitalization is shaking the fundamentals of the banking business.

2.2 The rise of Alternative Financing

Here as well, twenty years ago there was no fintech, no crowdfunding.
Today the banking business is increasingly eaten by fancy technology companies (fintechs).

Just as technology as disrupted the transportation business with Uber, the lodging business with AirBnB, the consumer lending business with so many peer-to-peer lending platforms available, Technology is about to disrupt investment banking.
This is happening.

Alternative financing models are progressing throughout the business lines. Peer-2-Peer consumer lending, Crowdfunding, Peer-2-Peer business lending, all of them are exploding over the past years.
This chart shows the situation in Europe but the worldwide situation is pretty similar.
The important information here is that the volume of peer-to-peer and crowd financing is doubling every year since 2012.

This is the landscape of alternative financing firms and startups. More companies are appearing every month, almost every week.
If you look at the global fintech landscape, you can multiply the count of companies here by 20.

Fintechs are eating the banking business.
Banking institutions need to adapt, or eventually a lot of them will disappear.

2.3 A whole new world for banking

Back in 2010 nobody ever heard that word. Only very high tech or finance specialists were aware of any crypto-currency.
Today everybody knows bitcoin and most people heard about blockchain.

While the blockchain technology is not ready yet to completely replace the trust third party, it has the potential to disrupt the very root of the worldwide financial system.
Happily here financial institutions have understood this from the beginning and a lot of blockchain initiatives nowadays are led by big financial institutions.

I focused a lot on how the digitalization is challenging the banking business.
But the blockchain technology is a good example that there are opportunities as well.

Another interesting example. Royal Bank of Scotland engaged IBM Watson to take care of the simplest customer requests coming from online channels, as a way to enhance operational efficiency.
I myself am not necessarily a big fan of IBM or Watson but this is actually a pretty sound use case for Watson.
And in any case it's a brilliant example of how technology can help banking institutions increase operational efficiency.

A team in the university of California has designed a model aimed at predicting stock prices evolution by using statistics of tweets, sentiment analysis and relationship discovery algorithms.
Not only they are able to predict stock prices evolution one day in advance but they came up with a model much more accurate that pretty much every other initiative so far.

Technology, here Big Data, also offers unprecedented opportunities for financial institutions.

2.4 Adapt ... or Vanish

Again, both the evolution of means and the evolution of behaviours induced by the new technologies such as

  • the digitalization of the masses,
  • the Big Data technologies,
  • the internet of everything,
  • etc.

have strong consequences on corporations and the society in general.

The digitalization
shakes the fundamentals of our society,
shocks our references and
revolutionizes our business models

Corporations need to adapt. The time is now or never.

3. Some definitions

I think the reader should now have a grasp on what I mean with the term "digitalization" so it's a good time to give a few formal definitions.

3.1 Digitalization

A first definition that I think is good, from Business Dictionary:

"The digitalization is
the integration of digital technologies
into everyday life
by the digitization of everything
that can be digitized"

This is happening today: everything that can be digitized, either is digitized or is getting digitized.
I realized recently that I myself haven't written anything down on paper for a pretty long time.
I use Internet to do my payments, book my holidays or business trips, search for a phone number.
I take notes on my laptop or my smartphone.
I even take my medical appointments using email.

The digitalization is the increasing integration of digital technologies into everyday life.
Corporations need to adapt their business models and operating model to follow this trend. They need to transform their business and make it suited to the digital era.

The following is the definition of the digitalization from OCTO Technology. I think it's brilliant.

"The digitalization is
the impact on corporations and organizations
of the fact that
people and things
are always and everywhere inter-connected
for every possible need

What interests us today is the impact of the digitalization on corporations and in this context the definition from OCTO Technology is crystal clear, accurate and most relevant.

Another way to put it would be:
The digitalization is the impact on enterprises and organizations of the Internet of Everything.

3.2 Digital Transformation

One definition remains: what is the digital transformation?
I could not find any easy way to present the notion of digital transformation as a one sentence.

Instead, I find the following schematic most relevant in presenting what is the digital transformation.

This square is a corporation. The orange form represent its organization, its processes and its culture.

The most recent technological evolutions, influence the society and causes an evolutions both of means and behaviours.

  • In terms of means, think of the always and everywhere interconnection of people and things, the consummerization, the new businesses such as crowdfunding and crowdsourcing, The availability of massive amount of data and the ability to analyze it, etc.
  • In terms of behaviour, think of the increasing digital literacy of people, the digital natives, all the behaviour changes brought by social networks and the increasingly connected world and real-time communication means. People want everything, now and tailor made.

This evolution of our society as a whole forces the corporation to transform its operating model, adapt its organization and its culture.

This is the 4th industrial revolution.

Corporations need to adapt three most essential aspects:

  • First, the internal organization of corporations needs to be adapted to match the responsiveness and dynamic required to design products in the digital era.
    Key practices here are Agility and DevOps at every level in the company around the IT organization designing the digital products.
    Management and hierarchy should also be adapted to enable low response time to market events and customer feedbacks.
    Finally, every action and decision within the corporation should be taken with customer centricity in mind.
  • Entering the digital era requires a significant evolution of the culture of the company.
    Lean Startup principle and practices should be embraces and a thorough Customer Development Process should accompany the Product development processes in place.
    Also, in the digital era with shrinking margins and increasing complexity of products and regulations, operational efficiency should be a constant focus.
  • Finally, The marketing approach should evolve to meet the customer expectations in a digital world. Customers expect corporations to meet them where they are, in a mostly online world. Corporations already started the digital marketing move many years ago, but that is not sufficient.
    In this ever more selfish world, people are looking for tailor-made. It's all about me, myself and I. Corporations need to consider this and thanks to a sound adoption of Lean Startup principles such multivariate tests, corporations have the possibility to provide customers with very customized solutions. Even further, it is nowadays common to implicate customers in the design of the product itself and even in the process of searching for new products to develop. Think co-creation and co-innovation.

Interestingly, just as technology is the driver behind the evolutions forcing corporations to adapt, technology is also the solution to the transformation of corporations.

Corporations need to understand that they have no choice. They need to digitalize significant portions of their business and understand the central place that technology has to take.
Corporations that still believe today that IT and Technology is a center of cost instead of the key vector for innovation will eventually disappear. Whatever the industry, IT and Technology must be considered as a key investment and the most important vector of innovation.

4. Challenges and Opportunities for Banking Institutions

So all this definition part has been pretty generic.
I would want now to focus a little bit more on the digital transformation of financial institutions.

I would like to consider the digital transformations on two perspective:

  • First perspective concerns the challenges that the evolution of means and behaviour from the digital era is causing to financial institutions
  • Second perspective is the opportunities that the digital era is offering to financial institutions.

4.1 Challenges


In the digital ear, comparisons and advising web sites flourish and new comparison services appear almost every month.
As an example, my father still buys his consumer electronic devices from the physical store closest from where he lives.
I myself, I am using an aggregation and comparison web site to buy my devices from the online shop offering me the cheapest price.
The same evolution that impacted consumer goods will eventually apply to absolutely every business including the banking business.
Banking institutions need to adopt a fair price policy and emphasize clarity and simplicity when designing their products.

Customer satisfaction

In a digital world, people wants everything immediately. In addition, reputation is very important and can be harmed in no time. People suffering from stolen credit cards will express themselves on social network and can harm the reputation of an institution that dealt badly with such a situation in no time.

Customer centricity

Today more than ever replacing enhancing a thorough product development process with a customer development process, meeting the customer where he is, focusing on needs and demands should be the core focus of financial institutions.

Marketing and branding

It's all about innovation and reputation. Design the best products, the most innovative ones, implement striking online and mobile services, communicate about them on the right channels and the chances they become viral are important.
At the same time, an anecdotal fact, discussed widely on the internet and becoming viral, can cause a lot more harm to a company than a bad balance sheet.
Again, making a difference in the digital era is all about innovation and reputation.

Operation Efficiency

With shrinking margins and increasing product development costs, corporations need to rethink the way they work. Tracking and eliminating waste should be part of the business processes used to run the company, not a side activity to be done once in a while when shareholders complain.
The key leads here are Process automation and the reduction of intervention delays.

Risk Management and Mitigation

In a digital world, the attack surface for cyber-criminal or simply thefts is much larger than in the traditional world. New channels, especially digital channels, to access the banking institutions products come with higher risks.
While a sampling approach to control and audit could be sufficient before, it is not the case anymore with the Digitalization. Banking institutions need to move their controls towards continuous, automated, comprehensive and real-time control and audit approaches.
State of the art fraud detection systems are not optional anymore.

4.2 Opportunities


In a digital world, technology can help putting in places platforms for co-creation and co-innovation, implicating the customers in both the identification of new products and their definition, which are ultimately the best way to handle innovation and the requirement for tailor made. In addition, digital products more than ever before can be made very customized.

Customer satisfaction

When processes and products are digitalized, achieving 24/7 availability is straightforward. A computer doesn't sleep. In addition, communication about fair price strategies is easier when the catalog of products is available online. Finally, even customer follow-up processes can be automated.

Customer centricity

The digitalization requires financial institutions to meet the customer on his preferred channels, but is also provides them with the means to do so. Getting online and digital, from a purely technological perspective, is not difficult. Changing the organization of the corporation to achieve the digitalization is the difficult part.

Marketing and branding

It's all about innovation and reputation.
The digital world offers unprecedented opportunities to convince a customer to buy a product. Think of trial systems, demo systems, sandboxes...
In addition, digital marketing is now a field on its own.

Operation Efficiency

Technology is also key to achieve Operational Efficiency. New products or technologies aimed at moving to a paperless corporation and de-materializing processes appear every month, not to say every week. Think of digital signatures, responsive interfaces, etc.

Risk Management and Mitigation

Here as well, most recent technologies such as Big Data Analytics, Machine Learning and real-time processing systems offer unprecedented opportunities to move towards continuous, automated, comprehensive and real-time control and audit approaches.
In addition, web technologies have significantly progressed over the past 10 years making it possible to build responsive dashboards to monitor Key Performance Indicators and Key Risk Indicators as well as state of the art Data Discovery Platforms.

5. Conclusion

I am presenting above the challenges and opportunities for banking institutions coming from the Digitalization. But again that is really one side of the medal, on the other side there is the increasing regulatory pressure and the shrinking margins.

With the digitalization, new opportunities for growth and innovation are emerging. Many banking institutions have started to move towards accomplishing the digital transformation in many aspects of their business. But the target seems to be still so far.
Others are struggling to identify the path and are put in danger by smaller actors or fintechs that are increasingly eating the banking business. They need to understand that the moment is now or never.

Part of this article is available as a slideshare presentation here:

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