Digital transformation is reshaping the banking industry, with both incumbent banks and neobanks facing their own set of challenges and opportunities. As consumers increasingly embrace digital options, traditional banks are feeling the pressure to innovate while balancing the maintenance of legacy systems that consume a significant portion of their budget. On the other hand, neobanks must navigate complex unit economics to establish a sustainable banking franchise in a competitive market.
Deloitte’s Nick Cowell, Digital Banking Leader, recently discussed the key forces driving the evolution of digital banking in a podcast. He explores the factors behind customer attrition and defines the characteristics of the eventual winners in the digital banking market. Cowell predicts that successful banks of the future will become multi-tenant or multi-product providers for their customer base.
Digital banking penetration has already reached maturity in Europe, and now the United States is experiencing a similar shift, particularly in retail and small business banking. The COVID-19 pandemic has accelerated the adoption of digital banking as consumers demand better digital channel experiences and the ability to self-serve across customer journeys. In fact, research conducted Deloitte suggests that 60% of US adults are likely to switch to a digital-only bank, with 20% of millennials already having a relationship with a neobank.
The competitive landscape in the banking industry is also changing. It is no longer just banks competing with banks, but rather the rise of fintechs and digital challenger banks that are disrupting different parts of the banking value chain. Additionally, big tech companies and other non-bank entities are entering the market with full-service banking offerings or tailored products, further intensifying competition. Incumbent banks must recognize this changing landscape and invest in digital transformation to ensure their survival and success.
Consumer expectations are also shifting, with consumers no longer solely focused on the best deals or sales. They now consider the ethos and values represented a brand, as well as the personalized experience and rewards tied to their purchases. Banks that can innovate around their brand, product offerings, and customer engagement will emerge as the true digital champions, while others may struggle to keep up.
One of the major barriers for incumbent banks is the speed of innovation, as organizational structures, internal silos, and decision-making processes can slow down progress. The burden of maintaining legacy technology and operational systems also hampers their ability to allocate sufficient resources to innovation. For example, CTOs and CIOs of large banks spend an average of 70% of their budget on maintaining legacy systems, leaving only 30% for innovation.
In conclusion, the landscape of digital banking is rapidly evolving, presenting both challenges and opportunities for traditional banks and neobanks alike. To thrive in this digital era, banks must prioritize digital transformation, become multi-product providers, and meet the changing expectations of consumers. By embracing innovation and remaining agile, banks can position themselves as leaders in the digital banking market.
– Deloitte Podcast with Nick Cowell, Digital Banking Leader
– Deloitte market research on digital banking adoption and consumer behavior.