The growth of fintech continues to bring financial services into a new age. Traditional banks must adapt because they are facing growing challenges in staying relevant. It’s true that established financial institutions have the advantage of long-standing market presence and customer trust on their side. However, that’s not stopping digital-only neobanks from conquering more ground with their more agile solutions.
If banks are to survive into the next stage of global financial evolution, they need to change their approach. They must start embracing innovation more actively than ever before.
Key Takeaways
- Traditional banks face challenges from agile neobanks, which are rapidly gaining market share and user trust.
- Neobanks, like Revolut and N26, exploit lower operational costs and respond quickly to customer demands, reshaping the financial landscape.
- Banks struggle to innovate due to bureaucracy, obsolete technology, and rigid processes that impede modernization efforts.
- To survive, banks must adapt by overhauling IT systems, fostering innovative teams, and collaborating with fintech firms.
- Modernizing operations is crucial for banks to meet the demands of tech-savvy customers in a digital-first world, ensuring their long-term relevance.
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The Growing Competition as Banks Adapt
The rise of neobanks is a global phenomenon that can’t be denied. If before, FinTech’s were small-time companies that no one paid any attention to and traditional banks didn’t perceive as any kind of competition, then today the situation has reversed itself completely.
Companies like Revolut, N26, and Monzo have begun to displace traditional players. They are capturing hundreds of millions of users across the world. In 2022, the neobanking sector size was measured at roughly $67 billion. Yet by 2030, it’s expected to cross the mark of $2 trillion. The growth rate is astounding.
And the thing is, it’s not hard to see why it can grow so much. Given their overall less capital-intensive infrastructures and lower operational costs, neobanks can scale with great ease. This allows them to be more responsive to changing customer demands. In comparison, they adapt on the fly in ways traditional banks cannot. This is because traditional banks are tied down as they are because of entrenched old-school processes.
On a more positive note, for banks, the years of stability behind them mean that they continue to lead in terms of consumer trust. In regions like the Asia-Pacific, in particular, nearly 75% of consumers have shared their confidence in established financial institutions.
Neobanks Catch Up
However, neobanks are gradually catching up, primarily by catering to tech-savvy customers who appreciate seamless, digital-first services and expanding their offerings. For example, companies like Wise and Klarna have already moved from simple payment-focused platforms to fully licensed financial institutions in their own right. Now, they are capable of offering a broad range of banking services.
In short, the time when traditional banks could afford not take FinTech seriously is long past us. The two groups are in direct competition today. As a result, this raises questions about how competitive classic banks are going to be in the long-term.
Why Traditional Banks Struggle to Innovate?
Despite the fact that many banks are well-aware of the need to modernize, things are not quite so simple that they could just do it at the drop of a hat. Bureaucracy, outdated technology, and rigid processes, there are many obstacles that make it difficult for banks to innovate as quickly as neobanks do. Legacy systems usually require a complete IT overhaul to support more modern fintech solutions, which is very taxing for banks to accomplish. The process is both expensive and time-consuming, and can be expected to get in the way of a bank’s operations. Not everyone is ready to commit to such a drastic transformation.
Another critical barrier is just how inert a bank’s infrastructure can be: they often have established IT and product teams that lack the agility of mind to understand and launch product innovations correctly. Either the organization places the wrong personnel in key positions, or it builds the processes incorrectly. Additionally, compliance departments, while essential to any bank’s operations, can add extra layers of control that slow down the introduction of changes.
All these internal factors lead us to the situation where innovation can’t be achieved without significant restructuring.
By comparison, neobanks enjoy a number of advantages that make their solutions much easier to use than their traditional counterparts. Faster transactions and the ability to manage your operations “in a single click” is certainly an attractive image for many people.
Furthermore, as I mentioned earlier, many neobanks today operate with full regulation and proper licensing, which strengthens their legitimacy, builds trust with potential customers, and helps them compete on an equal footing with traditional banks.
How Can Banks Adapt and Plan for Survival?
With everything we’ve covered so far, the picture is clear: traditional banks must adapt to stay competitive. The question is, how? Personally, I believe that the path forward is through a mix of internal IT overhauls and strategic collaboration with fintech firms.
One way or another, addressing legacy systems is crucial if banks are to create a more flexible banking environment that can keep up with modern demands. This is especially true for traditional banks in Hawaii, where aging infrastructure and limited access to technical resources can make digital transformation even more challenging. Yes, upgrading the infrastructure is costly, but there is no getting around it if a bank wants to support new-gen digital services and keep its clients interested.
However, to build innovation-friendly systems, you need innovation-friendly teams. By hiring the right professionals with fintech experience and placing them in the right positions, banks can foster a mindset capable of adapting to new technologies. Restructuring compliance workflows and empowering creativity in the IT and product development teams can lead to faster implementation of new solutions.
Lastly, collaborating with fintech firms will allow traditional banks to leverage the expertise and technological solutions of their nimbler counterparts. In so doing, banks will be able to integrate digital offerings into their systems without having to uproot their entire infrastructure.
Final Thoughts
Bottom line: if banks want to survive, they need to adapt to the rapid pace of fintech innovation. Many would rather play to their own strengths and avoid looking at this fact. However, technology-driven convenience of service is the name of the game today. The new generation of consumers is growing up in a digital-first world, and that convenience will decide how the balance shifts between banks and fintechs.
By modernizing internal systems and adopting a culture of innovation, traditional banks stand a better chance of retaining their relevance, since it would allow them to meet the growing needs of today’s customers. The journey won’t be an easy one as banks adapt, but it is a necessary one if they are to compete for their place in the digital age.
