Digital banking: traditional banks versus fintech providers

The global digital banking market was worth US$12.1bn in 2020 and is expected to hit approximately $30bn by 2026. It’s clear that this fast-growing, lucrative space is not just for traditional market players like high street banks anymore – but for emerging fintech providers too. 

A key trend in this sector that is set to accelerate is digital-only banking accounts such as Monzo, Starling and Revolut. In the UK, 14mn adults already bank with digital only accounts, a three-fold increase since 2019 – and that number is expected to hit 23mn by 2027. Notably, 41% of digital-only banking account holders are Gen-Z adults, and nearly half of all digital-only accounts (47%) have just a £1,000 average balance. 

So, what does this mean for traditional banks? Why are customers moving from an HSBC or Barclays current account to the Monzo app? The answer lies in personalisation. Challenger banks like Monzo have the agility and speed in innovation to meet customers’ needs in terms of their lifestyle choices. And even if this need constantly changes, new and emerging banks are better able to offer more that is hyper-personalised and highly appealing, such as attractive pricing and simple account opening for money transfers and day-to-day transactions. A key differentiator is their ability to provide very detailed, real-time bank balance and transfer notifications – something traditional banks cannot do as easily because of their existing core legacy 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 incumbent 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 instance, with NatWest or HSBC, you can speak with a banking representative about your banking matters almost any time you need. Many of the digital-only banks offer online support only. High street banks also have the advantage of inherent trust which they can use to their advantage, as many customers have a legacy of confidence in their traditional banks. 

While high-street banks have the right digital processes in place, it’s the end user customer experience that’s currently inadequate. Many of these banks aren’t agile enough to streamline digital processes like a fintech provider due to the complexity of their back-office legacy systems. To truly lead the way in digital banking and particularly make their offering attractive to Generation Z, these banks must strategically analyse what applications directly impact their customer and lift those out of the legacy core. By extracting this intelligence out of the back-office and moving it into a mid-office layer that sits closer to the digital channels for customers, banks can simplify complex operations and infrastructure and embrace intelligent technology to create the right service bundles for their customers. It will also allow them to understand how to leverage customer data to offer service-first models, just as the challenger banks do, and to stop looking at the legacy core system as a hindrance.  

Ultimately, banks must embrace a shift in mindset to adopt a more customer-centric, technology-driven approach to deliver the hyper-personalised services that customers (especially younger customers) expect. If they don’t, their customers will continue to move to challenger banks and embrace their service-first approach to meeting their financial needs – leaving traditional banks behind.

About the author:

Amit Dua is President of SunTec Business Solutions, a UK-based pricing and billing company that creates value for enterprises through its cloud-based products.