Digital banking: traditional banks versus fintech providers
The global digital banking market was worth $12.1 billion in 2020 and is expected to reach around $30 billion by 2026. It’s clear that this fast-growing, lucrative space is no longer just for traditional market players like high street banks – but for emerging fintech providers as well.
A key trend in this sector that is set to accelerate is digital-only bank accounts such as Monzo, Starling and Revolut. In the UK, 14 million adults already bank with digital-only accounts, a threefold increase since 2019 – and that number is expected to reach 23 million by 2027. Notably, 41% of digital-only bank account holders are Gen-Z adults, and almost half of all digital accounts (47%) only have an average balance of £1,000.
So, what does this mean for traditional banks? Why are customers moving from an HSBC or Barclays checking account to the Monzo app? The answer lies in personalization. Challenger banks like Monzo have the agility and speed of innovation to meet customers’ lifestyle choice needs. And while this need is constantly changing, new and emerging banks are better able to offer more that is hyper-personal and highly appealing, such as attractive rates and easy account opening for money transfers and day-to-day transactions. A key differentiator is their ability to provide highly detailed real-time bank balance and transfer alerts – something traditional banks cannot do as easily due to their existing core systems. For many people, challenger banks offer a better customer experience and give them the products and services they need when they need them – and this is a key test for established banks.
How can incumbent banks compete with digital banks?
Although fintech providers are naturally more nimble and perhaps less complex in nature, there are many areas where high street banks are still superior in the digital banking space. They have developed solid and secure digital channels and processes and unparalleled customer service support. For example, with NatWest or HSBC, you can speak to a bank representative about your banking matters at almost any time. Many of the digital-only banks only offer online support. High street banks also have the advantage of inherent trust which they can use to their advantage, as many customers have a legacy of trusting their traditional banks.
While high street banks have the right digital processes in place, it is the end user experience that is currently inadequate. Many of these banks are not agile enough to streamline digital processes like a fintech provider due to the complexity of their legacy back-office systems. To truly lead the way in digital banking and especially make their offerings attractive to Generation Z, these banks need to strategically analyze which applications directly impact their customers and lift them out of the old core. By pulling this intelligence out of the back-office and moving it into a mid-office layer closer to the digital channels for customers, banks can simplify complex operations and infrastructure and embrace intelligent technology to create the right service packages for their customers . It will also allow them to understand how they can leverage customer data to offer service-first models, just like the challenger banks are doing, and stop seeing the old core system as a hindrance.
Ultimately, banks need to embrace a shift in mindset to adopt a more customer-centric, technology-driven approach to deliver the hyper-personalized services that customers (especially younger customers) expect. If they don’t, customers will continue to move to challenger banks and embrace their service-first approach to meet their financial needs – leaving traditional banks behind.
