What is financial DX? Explaining issues, current situation, and key points based on previous cases.

The realisation of DX for financial services and corporate processes is referred to as financial DX. Since the systems used by the financial industry are legacy systems, if action is not done by 2025, the systems will approach the end of their useful life, which will cause the industry to lag significantly in terms of economic factors like competitiveness and maintenance costs.

To effectively address the sophisticated social challenges and improvements in customer experience that come with digitization, the banking industry must support digital transformation. An introduction to financial digital transformation, case studies, obstacles, and important information are all included in this article.

What is Financial Digital Transformation?

“Financial DX” describes business change and the digitization of financial business processes and services. The market is rapidly becoming more digital thanks to IT advancements. Financial institutions are being challenged to implement internal changes, deal with management and business challenges, and reconsider channel strategies—such as enhancing customer experience and streamlining management and operations—as a result of the market’s increasing digitalization.

Complex societal challenges like reviving regional economies in the face of an ageing population and new social obligations like carbon neutrality and ESG investing must also be addressed. Digital transformation in finance is essential to tackling these problems from several perspectives.

What is DX? Why is it important for business?

The use of digital technology to improve people’s lives is known as DX (Digital Transformation). It is predicated on the idea that “evolving technology enriches people’s lives,” which was put forth by Professor Erik Stolterman of Umeå University in Sweden in 2004.

The definition of DX in business is “the use of digital technology and data to bring about change in all business processes,” and the Ministry of Economy, Trade, and Industry is aggressively promoting DX.

Furthermore, the rate of change in the market environment has accelerated due to advancements in digital technology and digitalization, with an unprecedented number of new products, services, and business models being developed across a wide range of industries.

for the purpose of preserving and enhancing competitiveness and carrying on with sustainable corporate growth. 

Why is it necessary to promote digital transformation in the financial industry?

As was indicated in the outset, financial institutions must support digital transformation in order to approach different problems from different perspectives. But the “2025 wall” is the main reason the banking sector needs to encourage digital change. Gaining trust is the financial industry’s top priority, and maintaining client money safely is a prerequisite to doing so.

Financial institutions have therefore made security a top concern and have closed systems that are only accessible by a few number of system vendors since they operate on-premise, which is a form of operation where servers and software are built and deployed in-house. Because of this, the systems are becoming more intricate and segregated as they are developed in accordance with the

By 2025, it’s possible that data cannot be transferred to new systems or that outdated systems will cease to function if digital transformation in the financial sector is not encouraged. Additionally, there’s a chance that inadequate upkeep and oversight will leave security holes.

It is imperative to restructure the system and encourage digital transformation in the financial sector in order to address these issues.

The current state of digital transformation in finance

In a poll on the state of DX initiatives by industry, 44.7% of organisations in the finance and insurance industries said they were “implementing DX,” according to the “DX White Paper 2023” released by the IPA in February 2023. When considering the industry average, which is slightly over20%, this is a high trend.

The use of FinTech, a word that combines finance with technology, which refers to the trend to merge traditional financial services with the newest digital technologies, is one explanation given for this.

Particularly, the following businesses are instances of those engaged in the digital transformation of finance: 

Moving away from legacy systems

A “legacy system” is one that is constructed using technology and methods from the past. Older systems are less compatible with newer systems and are more complex to modify.

The systems of financial institutions are on-premise, as was previously noted, and each financial organisation has grown and created its own systems, isolating itself. In actuality, 100% of financial companies have some sort of legacy system, according to the Ministry of Economy, Trade, and Industry’s “DX Report”. 

It is particularly challenging to innovate and diverge from sections that have been neglected for a long time because they are getting older and more like black boxes. Furthermore, errors are rarely tolerated in the financial sector because its fundamental goal is to win over customers’ trust and handle their funds safely.

Because of this, people often shun new projects that have a chance of going wrong or are extremely careful about them, which makes it challenging to advance with system updates.

Securing digital transformation talent

One of the biggest obstacles to financial digital transformation is the scarcity of skills for digital transformation. FORTRAN and COBOL are two of the more antiquated computer languages still in use in the banking sector.

But since many of the individuals who utilised these programming languages are getting close to retirement age, it’s important to transfer their knowledge and expertise to their heirs. However, it is challenging to pass them on because a large number of the source codes are extremely sophisticated.

Additionally, in order to advance financial DX, it is imperative to train DX workers who comprehend financial operations; nonetheless, training personnel who can react effectively in a short amount of time is not feasible.  

Variation in customers’ IT literacy

Another challenge for financial digital transformation is the variation in IT literacy among customers. Digital technology changes very quickly, with new technologies appearing every few years. This means that the latest technology available today may well become outdated in a few years’ time.

Therefore, if there is variation in the IT literacy of customers, customers who are not familiar with IT will not be able to adapt to changes in systems and services. Therefore, in addition to building a foundation that can adapt to technological changes, it is necessary to review the workflow for customer segments and develop a strategy for what system will realize the flow .

Introducing the latest technologies such as AI

It is anticipated that the adoption of cutting-edge technology like artificial intelligence (AI) will increase operational effectiveness and customer happiness. For instance, there have been instances when AI has automated help desk tasks using chatbots after learning a great deal of data about consumer requests.

Additionally, it can be used to forecast future events by drawing on a vast amount of historical data for learning. In fact, several businesses are utilizing AI to forecast stock values.