Top 6 Challenges of Digital Transformation in Bankingby@dariaspizheva
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Top 6 Challenges of Digital Transformation in Banking

by Daria SpizhevaApril 9th, 2024
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This article aims to describe what is digital transformation in banking and highlight the top six obstacles preventing the banking sector from embracing digital transformation. Explore the three prominent external and three internal challenges confronting digital transformation in the banking industry.
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The banking industry is going through a big change at the moment. Customers want different things, competition is tough, shareholders expect more, and there are lots of new technical advances. As a result, banks have to change the way they do things digitally. It's not that banks don't want to change — it's that there are big hurdles in the way. In this article, we'll take a close look at these hurdles.

We'll start by looking at the top three external challenges that are impacting digital transformation in banking.

Limited Ability to Partner with Fintechs

The banking sector traditionally operates in a silo mentality, which makes collaboration with fintech companies a challenge. Navigating it requires understanding the ethos of collaboration, aligning goals, and creating symbiotic partnerships that can drive innovation within the banking sector.

In many cases, banks find it difficult to establish these partnerships due to concerns about data and financial security. However, fostering an environment of proactive engagement with fintech companies can greatly boost efforts to overcome the challenges of digital transformation. Here’s what a Chief Digital Officer at a U.S. bank anonymously shared in a survey:

“When we work with a third party, we expect to hold them to every standard we have, even when it’s onerous to us.”

Many banks acknowledge partnering with FinTechs as vital to their success, despite the potential risks, such as the loss of control over new digital services. An example is a large bank in the Asia-Pacific region adopting Apple Pay due to customer demand, despite initial hesitations.

That said, forming partnerships with FinTechs is not without challenges. FinTech companies, given their different IT systems and speedy operations, may not have the capacity to integrate seamlessly with the complex systems of traditional financial institutions. Barclays Ventures CEO, Ben Daley, acknowledged to Deloitte the role of larger organizations in helping FinTech companies navigate these complexities.

The collaboration in Bank & Fintech. Source: OpenFinance 2020

Successful banking-FinTech partnerships are not built overnight but require a shared long-term vision and matching values. Aligning corporate goals is key to overcoming these financial services industry challenges and preventing partnerships from crumbling due to mismatched expectations.

Regulations Constraining Large-Scale Digital Initiatives

Existing regulatory frameworks struggle to keep up with the speed of technological innovation. Regulators are being urged to adopt more agile and principle-based regulations that can evolve over time, instead of fixed and potentially outdated structures.

“PSD2 (European Commission Payment Services Directive 2) is coming into force now and it was designed seven, eight years ago—so you can imagine the changes [in the marketplace] … We need to think about activity-based regulation.” – Ana Botín, Executive Chairman of Grupo Santander

Financial institutions are governed by a unique set of rules and regulations compared to start-ups and FinTechs. These regulations are often based on the type of institution rather than its specific activities. This poses a challenge as the landscape of financial services is quickly evolving, with services being repackaged and restructured in new ways.

There are a few key regulations that are impacting large-scale digital transformation in banks:

  • Data Privacy Rules. Laws like Europe's GDPR and California's CCPA strictly dictate how banks handle customer data, making it harder to offer personalized digital experiences.
  • AML and KYC Rules. These regulations mandate thorough identity checks and constant transaction scrutiny to prevent illegal activities, complicating the process of digital onboarding and account setup.
  • Capital and Liquidity Requirements. Post-2008 financial crisis regulations force banks to maintain a high volume of cash and assets, restricting their ability to invest in novel digital platforms and operations.
  • Cybersecurity Rules. The increasing demand for cybersecurity, breach notification, and resilience calls for significant IT investments from banks, ensuring secure digital channels and protection against cyber threats.
  • Legacy Tech Limitations. Many banks rely on outdated systems and cumbersome infrastructure that hampers the creation of agile new digital platforms. Addressing these legacy systems requires a major tech overhaul.

High Investor Expectations Hindering Digitalization Efforts

With soaring investor expectations, banks often find themselves under pressure to deliver immediate returns. This has the potential to stifle long-term digitalization efforts, that require time, patience, and a tolerance for risk.

Regional banks such as PNC and US Bank have scaled back plans for national digital expansion and new digital-only bank brands. Investor enthusiasm has been dampened by economic conditions and challenges in the financial services industry, particularly in balancing digital growth with risk management. Here’s what an anonymous Chief Innovation and Technology Officer at a UK bank said to Deloitte:

“Shareholder expectations really put a strain on how much money you can put into digital transformation. Everyone knows the customers’ demands, but it is about us creating the financial capacity to invest in it. We know what to improve, just how do we do it? You have to hit ROE numbers or your share price won’t perform.”

High investor expectations have a substantial effect on financial services transformation. As stakeholders of the bank, investors naturally demand good short-term returns. However, these expectations can sometimes put banks under pressure, making them wary of investing in digital transformation – an initiative that usually requires time to show a return on investment.

Similarly, in Q3 2022, Wells Fargo announced slower-than-expected progress on its digital transformation initiatives. This led to disappointment from investors and analysts, with the bank's stock price falling over 5%. Wells Fargo had to scale back some of its digital priorities to focus on stabilization and risk/compliance projects.

Balancing these expectations while investing in long-term digital transformation often becomes a challenge.

Let's now shift our focus to the top 3 internal digital banking challenges that hinder the digital transformation initiative within banks.

Legacy Systems and Lack of Interoperability

Around 60% of banks are still dependent on legacy systems. Updating and adjusting old systems to work with new digital technologies hold bank digital transformation behind. Interoperability issues often stump digital transformation plans.

Wells Fargo suffered a systems outage in March 2023 that left millions of customers unable to access online/mobile banking or ATMs for over 24 hours. The bank blamed the outage on its reliance on outdated infrastructure that couldn't handle a power shutdown. Similarly, Bank of America announced in 2023 that it would delay the launch of its real-time payments platform due to technical difficulties interfacing the new tech with the bank's older systems.

Even though many banks see the need to move away from these old systems, practical changes often pose a challenge without disturbing existing work. Moreover, not all fintech and digital banking solutions are made to work well with legacy systems, leading to pricy and dragging customizations.

Three ways to replace banking core systems. Source: McKinsey

Banks need to work around old systems that have been in use for many years. These legacy systems often fail to offer the compatibility needed for successful digital banking transformation. Banks then, face the issue of upgrading these systems without hindering daily operations. This demands careful planning and gradual application to ensure a smooth transition.

Ultimately, the obstacle doesn't rest solely on the technology itself, but how it’s integrated into the banks’ current system, procedures, and culture. Adopting digital banking transformation means developing comprehensive strategies that not only incorporate the technology but also delineate how it will impact and improve various processes within the bank.

Focus on Regulatory Changes, Instead of Finance Transformation Initiatives

Often, internal focus on complying with regulatory changes takes precedence over technological transformation, creating more banking industry challenges. Nearly 50% of banks are concerned about meeting regulatory compliance. While this focus protects banks from potential legal risks, it can divert valuable resources and attention away from much-needed digital transformation.

This is yet another internal issue of digital transformation challenges. Although regulatory changes are crucial for controlling risk and improving transparency, they can also shift the focus away from digital transformation initiatives. Institutions need to find a balance between meeting regulatory demands and prioritizing digital initiatives by creating dedicated teams or outsourcing regulatory processes.

Digital transformation in banking goes hand in hand with regulatory compliance – a factor that often diverts attention and resources away from innovation. That's because regulatory changes in the banking industry are frequent and substantial, imposing a significant burden on banks' internal structures. The constant flux of rules and norms forces many financial institutions to focus their efforts on ensuring policy adherence rather than driving digital innovation. This mindset constricts the tempo of digital transformation, ultimately slowing progress within the financial services industry.

Risk-conscious Culture Preventing Innovation

It's no secret embracing the risk involved with innovation could potentially lead to tremendous growth. The future of finance lies in digitalization, from fintech collaborations to the wide-scale implementation of blockchain technologies. Thus, fostering a more balanced culture that values both safety and innovation is one of the biggest challenges of digital transformation in banking.

Moving forward, banks should look into integrating their risk-conscious nature with the agility and innovation of fintechs. Incorporating IT for financial services should be considered a key element in any banking transformation plan, with strategies adjusted to accommodate industry regulations without stifling progress.

The path towards more customer-focused, efficient, and secure banking services may be filled with challenges, but these obstacles are vital stepping stones toward digital transformation in banking. As banks start to reevaluate their risk-averse attitudes and welcome change, the promise of a fully digital, customer-centric era in finance edges closer to reality.


Employing a banking digital transformation demands a well-planned, strategic methodology that considers both external and internal elements. Only 17% of banks have succeeded in digitally transforming at scale, which emphasizes the need to approach it strategically. Overcoming these challenges is tough, but the benefits make it worthwhile.

“The riskiest thing we can do is just maintain the status quo.” — Bob Iger