The Impact of Digital-Only Banks on the Traditional Banking Industry

Digital banking has boomed over the last few years, yet cross-selling and switching has not substantially shifted. According to PWC, less than “10% of UK customers with mortgages, personal loans or insurance held them with their main banking provider”, and according to comparison site Finder, over a quarter (27%) of British adults have opened an account with an online only bank as of January 2022.

Digital-only banks like N26, Starling, Monzo and Allica Bank have changed the game in the retail banking world. Without legacy technology to contend with, such organisations have typically been more agile than their large high street banking counterparts in adapting to changing consumer preferences, building superior online app focused banking. Fintech investment in the UK and globally is still growing despite funding and valuations coming under pressure. Recent Celent research stated 75% of financial institutions globally see the threat of fintech and challengers increasing, whilst 58% believe it is harder to win and retain customers. This is great for consumers, but how is it impacting traditional banks and how do they improve their own digital capabilities to better compete?

Approach 1: Invest in low code to create new services

There are tools on the market that make it easy for longstanding banks to create new business applications quickly and easily. This can reduce the reliance on changing legacy systems, instead connecting to them for data that is needed. Low code software enables companies to adapt more quickly to changing consumer preferences with drag and drop functionality, allowing the creation of new services from whole teams - not just IT workers. For example, they could use low code to give customers an understanding of the spending across all accounts, connecting different transactions from different systems, something that ING offered with Yolt.

Approach 2: Collaborate with partners

Traditional banks can compete with challenger banks, but they need to think differently and reject the idea that the way they have always done things is the best way to do them. Whilst traditional banks have a known legacy which presents a challenge, they must focus on how they can attract new generations, while also changing how their brand is perceived. Brands should collaborate and partner with other organisations, focusing on new branding and ways to reach different communities. An example of this is when we saw NatWest launch the sub brand Mettle, with an improved onboarding/set up compared to the access of the main brand – which made it faster and more simple for customers to onboard with. Of course there’s always the buy option as National Australia Bank (nab) did in their purchase of 86:400 in Australia.

Approach 3: Trust as the foundation - evolution as the differentiator

Traditional banks are a safe bet for consumers, as they are known for a long history in looking after people’s finances, but these banks need to understand this isn’t enough to fall back on if they want to see sales grow this decade, especially when customers understand the fragility of banking as a whole from their experience of the 2008 financial crisis.

On top of this, as mobile banking becomes so dominant, it’s the phone and the app interface that is front of mind and where trust starts to be built. There is still one big advantage the traditional banks have and that is the range of products and services. Although, newer banks are expanding their product portfolios often through partnering, for example N26 has partnered with Stripe to streamline consumer deposits, or Starling partnering with Habito for mortgages.

The retail banking space is in an exciting period in history. Yes, it is a highly competitive market, but this is not necessarily a bad thing for traditional banks. It’s making them review their offerings and work out how to modernise and improve them for the present day. Banks know they have to up their game to reach an ever growing and ever-changing consumer, which in turn is changing their internal structures for the better. Big banks have a great opportunity in front of them, but they need to grab it with both hands and be willing to invest in change if they don’t want to fall behind the competition.