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Digital Transformation for Small Banks

Digital Transformation for Small Banks - Digital piggy bank
Chris Adams
Chris Adams
January 9, 2023

Rapidly advancing technology and a quest for innovation across society as a whole have led to a shift in metrics for progress. In the banking industry, digital transformation has become one of the most popular buzzwords, with everyone from the major international players to small fintech firms shouting from the rooftops that they are embracing it. The reality is that large banks are poorly positioned to transform their operating model, and either don't grasp the overarching concept, aren't truly committed to the process, or are only paying lip service to the change process instead of seeking true transformation.

However, digital transformation for small banks can be an opportunity to gain a leg up on more heavily entrenched competitors and offer your customers unique banking solutions and digital capabilities. Most banks offer mobile apps and other online features, so what is digital transformation in banking?

Defining True Digital Transformation

Many large financial institutions continue to use legacy systems and find ways to add products and services that implement some level of technology or have more online services. That isn't transformation, and it limits their ability to add fresh financial technology as much of it is incompatible with those aging systems. These enterprises bank on appealing to a wide variety of customers with their services. Still, true digital transformation is a rethinking of traditional banking services in their entirety.

Digital Ai

Replacing core systems, integrating artificial intelligence (AI), using machine learning, or utilizing blockchain are all emerging trends that can become a part of your digital transformation journey. This is where small institutions can make their mark. Without a large footprint or overhead, they have an opportunity to be more agile, and they can capture a small, specialized segment of the market rather quickly. Large traditional banks need to pivot more quickly to capitalize on new customer expectations.

The Advent of Neobanks

As younger customers and employees seek innovation and technological advancement, small neobanks partnered with creative fintech firms can easily attract highly skilled talent unlikely to find a home in a traditional financial institution and tech-savvy customers looking for more control over their finances. Where large firms have been using legacy systems for decades, they are facing costs upwards of hundreds of millions of dollars to rework the backbone of their operating model. Not only is the cost prohibitive, but the difficulty in developing compatible systems is immense, as is bringing over all the historical data and information.

Those challenges are not something that will hamper neobanks. Taking something as simple as a loan application, a neobank can set up a new customer account in seconds. Research has shown that they can average a speed of 20% faster in the approval process than a traditional bank. In larger banks, this process can entail multiple human employees across several departments and take substantially longer.


Security concerns abound when you're talking about the banking industry or technology in general. Cybersecurity should be at the forefront of your decisions toward digital transformation. As members of a highly regulated industry, all financial institutions should take proactive steps to secure their customers' information and other sensitive data. Third-party software security risks are not the only concern.

Cybersecurity is another major reason large financial institutions should endeavor to move away from legacy systems. Cybercriminals move just as quickly as the technology field itself. Given the substantial time they've had to compromise legacy systems, any new vulnerability runs the risk of being quickly exploited. This isn't to say that neobanks and those that fully embrace the digital revolution are immune. Still, more modern programs and applications have the potential to be significantly more secure as long as they are constructed responsibly and with regulatory compliance in mind.

Developing Your Digital Transformation Strategy

Much like any other transformative process, digital transformation for small banks should follow a well-thought-out and structured plan. An overall tone shift for the enterprise regarding goals moving forward and a detailed document laying out steps, metrics, and benchmark dates should be prioritized early in the process.

Set the Tone From the Top

Too often, change management is provided lip service by executive-level employees without a real shift in the mentality of day-to-day operations or internal processes. With something that runs as deep as a digital transformation, the C-suite must make it clear that these new products and services being developed and rolled out will be the best path forward. Each employee has to embrace the importance of such a substantial paradigm shift for it to take hold.

It's particularly important for small community banks to embrace this process and keep sight of what sets them apart from their competitors. Large financial institutions have billions of dollars to throw at a digital transformation process. They can stand up teams of hundreds of employees and networks of vendors to accomplish their goals. Fintechs and neobanks are piloted by tech gurus who eat, sleep and breathe innovation and advancement.

Community banks have traditionally always had a high-touch approach with their customers. Knowing your customer and engaging with them on a much more frequent and personal level draws many consumers to a small bank in the first place. A digital transformation doesn't need to abandon those ideals; just tailor the approach. This is a way to draw in new, younger account holders by providing a technology-driven customer experience that still focuses on what sets you apart from the rest of the pack.

Here's a streamlined, three-step plan for a small bank's digital transformation journey that you can use as a template or modify for your purposes.

Start With a Single Platform

One can see that more consumers desire less human interaction in their daily tasks and errands. That trend is unlikely to reverse course any time soon. Yet, some small banks need a mobile app, and others have terrible functionality with even worse customer reviews. A single-platform mobile application is the perfect starting point. If you're an established small bank with an existing legacy system, it's simple enough to build out an API that pulls the legacy system's data and presents it through an improved user interface.

Touch ID

Small businesses and retail banking customers are alike in their hatred of lines and wasted time. A secure, well-built app can address that and serve as a flexible base for your digital transformation for small banks' strategy. Using Touch ID or Face ID and multifactor authentication further secures your new application, and harnessing cloud-based solutions for any support tasks should keep your app lightweight and easier to manage. You don't need to reinvent the wheel, either. Beginning with a handful of functions that a user can complete without human assistance, you can slowly expand to no more than 10-12 functions like checking balances, ordering statements, and paying bills.

Expand Functions Across Platforms

Once you have fully fleshed out your application and are sure of its security and functionality, you can expand to additional operating systems. If you launched on iOS, proceed with Android, web apps, or even Alexa applications. Poll users to determine their most desired functions and harvest additional data that you capture based on their use of the existing program. Then use this data to inform how you can proceed from there.

You may find that your customers are more interested in mobile wallets and contactless payments, or you could discover that there are user interface improvements that they value more. This is also a critical point in time to leverage those local relationships that you have built as a small banking institution. Offering retail discounts, cash-back options, or other loyalty rewards programs based on those networking contacts with other local businesses can make your app stand out with the more personal touch that your customers have come to expect.

Embrace Fintech Collaboration

One rapidly growing and popular segment within fintech is the use of robo-advisors. Providing personalized financial advice to your customers based upon their representation of their risk tolerance and the data that you have collected with your existing application through the use of artificial intelligence and machine learning is at the forefront of many fintech firms. This can be used as an investment asset management service, market trend analysis, or even to recommend non-investment financial products from your catalog of offerings.

If a pure robo-advisor is not something that your bank is willing to broach at this time, then you should consider a hybrid robo-human advisement system. The Financial Times has estimated that this hybrid model could be managing over 10% of the global investable wealth by 2025. What better way to transform your investment offerings than by being on the cutting edge of AI investment?

You should also integrate chatbots into your mobile app during this phase of your digital transformation journey. There are already ready-made products that can seamlessly fold into your existing application and provide functionality on Snapchat, Facebook messenger, and many other common messaging services. Since research has shown almost 80% of all inquiries through a chatbot service are straightforward, this feature can address almost all problems without human intervention.

Build on Your Successes

Online Banking

The mobile application is simply a starting point. Alone, it can't be a transformation, but by building on the successes you achieve in that vein, you can use it as the nexus for a truly transformative process. With a shiny new UX and useful integrations, it's time to update your backend systems. Sticking with a legacy core system will limit your ability to continue making improvements to your app and other technological upgrades. As we discussed above, it significantly increases your vulnerability to cyber attacks.

Resistance to change is common, and banking institutions are notorious for it. With a fully functioning and innovative new mobile app, you have a fresh win in your pocket that shows the benefits of a digital transformation. Capitalizing on this by building a new core system is the best way to set yourself up for continued advancement.

Selecting a New Core System

At this point, you can take your backend in one of two directions: an omnichannel platform or a multichannel system. The multichannel system is still a familiar siloed approach, whereas an omnichannel platform integrates many microservices and shares information across them all. This increases touch points and can give a more tailored customer experience. It's also significantly more expensive and difficult to implement.

Regardless of the decision that you choose to move forward with, the keys to succeeding at this phase of your digital transformation are selecting the appropriate vendors, redesigning your internal structure to better suit the new core system, maintaining clear and open lines of communication with both your vendors and your team, and effectively managing the change process both within your enterprise internally and with your customers. Of all of those, communication is by far the most critical. Keeping everyone informed leads to better expectations and less fear of change.

Good Risk Management Practices are Essential for Banks of All Sizes

At Venture Lynk Risk Management, we offer a wide range of risk management services to help support digital transformation for small banks and the entire financial services industry.

Our team of risk management specialists has the unique experience of prior military intelligence and subject matter experts that can apply their knowledge to your specific concerns. Whether it's intellectual property risk management, cybersecurity, vendor management, or continuous monitoring, we offer customized solutions to high-risk enterprises of any size across finance, healthcare, and more. Contact us today, and let's work together to find a solution that benefits your situation.