By targeting markets that are underserved by traditional banks, neobanks and fintechs are quickly gaining ground on incumbents, one strategic segment at a time. Many traditional banks now find themselves playing catch-up, but they are often hampered by complicated IT architectures and conflicting business priorities.
A new report by Bain & Company and cloud banking platform, Mambu, reveals that for traditional banks to compete in this shifting arena, they will need to pursue digital transformation, addressing an even broader call to action: augmenting legacy systems to accelerate growth and aligning their tech strategies to the most promising emerging markets.
“With disruption being greater, faster and more unpredictable than ever before, incumbent banks—possessing outdated roadmaps and weak tech strategies—stand at a great disadvantage among their competitors,” says Philipp Baecker, an expert partner in Bain & Company’s EMEA Financial Services practice and lead author of the report. “Customers’ wants and needs have been completely reshaped by the pandemic and an increasingly digital lifestyle. Failure to keep pace with these changing market needs will mean that banks wage the risk of being overtaken by nimbler, neobank competitors, who are laser-focused on creating high quality, hyper-relevant solutions and experiences for their customers and are already reaping the rewards from their efforts.”
"The rise of new players in finance has put the challenges faced by incumbent banks squarely in the spotlight," said Jeff Tijssen, Bain & Company's global head of fintech. "To compete effectively, banks will need to adapt an agile approach to operations, scaling customer-centric propositions that will allow them to create highly personalized solutions and regain their position in the market."
As incumbent banks are quickly learning, banking is no longer a one-size-fits-all solution. Customers are increasingly overlooking generic, mass-marketed products, but traditional banks have failed to recognize that personalization is quickly becoming a marker of banking agility. Neobanks and fintechs, however, are currently winning on customer centricity, using it as the basis for all their significant decisions—from product development and marketing to investment allocation.
For digital banks, this laser focus on personalized solutions and experiences has led to a 4% to 8% growth in revenue over competitors, as well as a dramatic increase in membership. In fact, according to the report, US digital-only banks are projected to service nearly 20% of the population by 2025, reaching more than 53 million account holders and nearly doubling their 2021 total of members.
“To offer personalized services and be truly customer-centric, banks must be agile and adaptive at their core, meaning they must learn to respond, iterate and pivot quickly, as business and customer needs fluctuate,” says Mambu’s Regional Director of Advisory Services, Kunal Galav. “That means unlocking new segments, such as gig-workers, or developing new products, such as buy now, pay later, to fulfil existing customers' needs and secure growth.”