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 institutes have the advantage of long-standing market presence and customer trust on their side, but 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 and start embracing innovation more actively than ever before.
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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, 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, adapting on the fly in ways traditional banks cannot, tied down as they are because of entrenched old-school processes.
On a more positive note, for banks, the years of stability behind them means 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.
However, neobanks are gradually catching up, primarily by catering to tech-savvy customers who appreciate seamless, digital-first services and expanding their offerings. The likes of Wise and Klarna, for example, have already moved from being simple payment-focused platforms to fully licensed financial institutions in their own right, capable of offering a broad range of banking services.
In short, the time where traditional banks could afford to not take FinTech’s seriously is long past us. The two groups are in direct competition today, which 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, 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 there’s a lack of correct personnel in correct positions, or the processes are not built correctly. Additionally, compliance departments, while essential to any bank’s operations, can also add extra layers of control that hinder the speed at which changes can be introduced.
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 already mentioned earlier, many neobanks today are fully regulated and licensed, which gives them more legitimacy and bolsters the trust of potential customers, evening out the playing field with classic 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. 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 their 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 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 of 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, but technology-driven convenience of service is the name of the game today. And seeing as the new generation of consumers is being raised in the digital-first world, that convenience is going to be the deciding factor in shifting the balance 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.
