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09. 20. 2018

Eastern challenges: digital transformation in CEE banking

Many banks in Central and Eastern Europe see themselves as digital disruptors but a fresh report on digital transformation in the region paints quite a different picture. One fifth of CEE financial institutions still haven’t addressed how to go digital and only about a third of them have dedicated teams working on it.

Manufacturing, retail and financial services companies in Central and Eastern Europe all agree that business as usual is no longer an option, thanks to the imminent effects of digital disruption. In a recent regional survey by Microsoft, 75% of respondents in these sectors said they expect at least moderate change in their industry. But banks and other financial institutions in the CEE region are bracing for a bigger turmoil: 89% are awaiting an industry shift and 60% expect significant disruption.

However, 85% of the region’s financial institutions believe digital transformation and new technologies will actually help them grow – this compares with a somewhat lower proportion at 80% in manufacturing. The main incentive for going digital is to get new customers (4.3 in a scale of 1-5), improve current products and services (4.2), and develop and launch new products (4.1%). Interestingly, they see product development nearly as important as more customer-centric drivers, unlike companies in manufacturing and retail.

CEE banks see themselves as disruptors

One of the key findings of the report is about where CEE banks expect disruption to come from. While financial institutions in much of Europe have been widely anticipating new player, like fintech startups, digital-only banks and technology giants, to become competitors, only 16% of CEE players believe disruption will come from new entrants. In fact, 28% believe change is on the way from established players in their own sector, and one in four local institutions actually see themselves as disruptors. This expectation is similar in retail and manufacturing (20% and 25%, respectively).

Only 36% of respondents working at financial institutions said there is a clear digital transformation strategy at their organisation, while 74% claim a formal strategy is in the pipeline. This compares with a combined average of 24% and 60%, respectively, in the three industries examined.

What’s quite alarming is that 20% of CEE financial institutions still don’t address digital transformation. And only about a third (34%) of them have a dedicated team, which, in many cases, works across multiple departments (25%). This should improve in the future though, as 19% of financial organisations are currently building a digital transformation team.

Take-up of AI tools expected to increase

It shouldn’t come as a surprise that the overwhelming majority of IT investments at CEE financial organisations are aimed at engaging and understanding customers. About 71% of respondents said moderate or high IT investments are planned in the next 12 months in business intelligence and big data analytics (71%), predictive and advanced analytics, biometrics and other tools (59%), and cognitive solutions and artificial intelligence (51%). Innovation in mobile applications and social tools are also among the top priorities for CEE banks (61% of respondents named these two areas; multiple answers were allowed).

Bringing in new IT tools and solutions are more often proposed by directors and C-level leaders (37%) than IT departments (29%). The survey also shows that the actual investment decisions are now a company-wide effort, with all divisions pitching in. About 94% of respondents believe that cloud solutions are driving digital transformation, and Microsoft predicts that in the coming years, AI will be at the forefront of many transformation projects across industries. The value of the AI market in the region is estimated to jump to about $222 million in 2021 from only $57 million last year, partly because chatbots, data mining and omni-channel tools are becoming more and more popular.

Key obstacles and digital maturity in CEE

Banks in Central and Eastern Europe are not having it easy with digital transformation. One of the biggest obstacles they face is the threat of security breaches (according to 45% of respondents in financial services), closely followed by the lack of internal readiness of management and employees (39%), shortages of skilled workforce (35%), government regulations (28%) and compliance legislation (28%).  

The technology revolution seems to cause them a lot of headaches, too, according to Microsoft. For respondents in financial services, the biggest pain points include intensifying competition, forcing companies to maintain competitive prices, customers becoming more demanding, as well as quickly shifting market dynamics, increasing the need to be more flexible.

Most financial services markets in the CEE region are lagging behind in overall digital maturity, another report by Deloitte found earlier this year. Several markets, including Hungary, Croatia, Slovakia, Romania and Bulgaria, fall into the group of digital adopters, while the only digital champions in the region are Poland and Russia. What makes them champions?

They offer a wide range of functions relevant to customers and next-level user experience. The two driving forces behind digital banking maturity in the region are customer preferences and market pressure from competitors. In some countries, like Poland, this pressure has driven banks to develop digital capabilities even faster than customers expect.

‘Big bang’ comes with big gain

When it comes to digital transformation strategies, some banks go for niche developments and then try to convince customers that they’ve become digital, Márk Hetényi, deputy CEO for digital, retail and strategy at MKB Bank in Hungary told W.UP in an interview earlier. These players often fully upgrade or transform their front-end systems, ending up with nothing but a temporary solution as future developments will sooner or later hit a snag.

MKB Bank reached a real milestone in digital transformation with the replacement of its legacy systems in July. “We’d weighed all our options and went for the big bang method of introducing most elements rather quickly, at the same time. Introducing elements step by step or in phases may require more time, and we didn’t want to burden our bank with extended projects, taking many years – especially as digitalisation is evolving at such a fast pace,” Hetényi explained.

Upgrading the entire IT infrastructure will also help product development as the bank can now bring new services to market more quickly. Not to mention developing new products and services with fintechs more smoothly, partially using APIs. “This transformation will open up new possibilities for customers in the next six to twelve months when we’ll start launching new solutions with fintech partners on a regular basis,” Hetényi added.

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