By Abe Smith, CEO at Paymentology,

The rising tide of neo banks in recent years has led to questions about whether the incumbents are about to become an endangered species, or even a relic of history. In reality, the solution for traditional banks is deceptively simple: they just need to bridge the gap between themselves and their customers.

For the first time in their history, banks are seeing a rising tide of Fintechs making inroads into services that they once monopolised. In some ways, this should not come as a surprise: most banks still rely on legacy systems and complex technology rendering them unfit for the demands of a digital age.

This creates a sharp contrast with the tech-savvy, digitally native competitors that have popped up in recent years. Unhindered by stacks of legacy infrastructure, these new entrants have brought innovations from across the fintech space into the world of banking, introducing everything from improved APIs to artificial intelligence and machine learning. But, more importantly, these challengers have brought the seamless consumer experience that people are used to in the retail world.

Banking customers of today are not only used to sleek interfaces, but also a smart service. It is no longer enough for a bank to merely provide a secure place to store money. In order to keep brick-and-mortar banks on the highstreets, the incumbents must compete with these emerging levels of connectivity and personalisation.

Sizing up the challenge

With fintechs slowly but surely changing customers’ expectations of banking services, it will come as no surprise that banks face a very real threat to a previously monopolised market. But, what exactly does that threat look like, and how imminent is it?

New entrants have seen opportunity in disaggregating the components of traditional banking, and offered targeted solutions, at lower prices. Consequently, many of the services that were once firmly within the remit of large banks have been reclaimed by fintechs. International bank transfer, remittance services, currency conversion and Direct debit services are just some examples. These have been long standing areas of substantial revenue to the traditional banks and with share of these markets being lost the banks must find new services they can provide to their customers to generate new revenues.

The impact of losing these additional revenue streams is one thing. But, another real danger for banks is that these secondary services provide a gateway to complete customer disengagement and eventual customer churn.

With neo banks able to offer free, or competitively priced secondary services, as well as hyper personalised banking for everyday use, there is a real chance that what was initial engagement with select services, becomes complete customer reclaim. Reaping the benefits that ultra-personalised, tailored services bring, customers move money to their neo bank the moment it is available, relegating the incumbent to nothing more than a temporary holding account.

In April 2021, data from Bacs showed that the banks UK consumers were changing allegiance to consisted of a considerable cohort of neo banks. This trend has been at play for some time now and if nothing changes, this customer churn will lead to long term loss of market share for banks.

How data can help

The good news is that this threat to incumbents is not existential, yet. For now,  51% of people still prefer to use a traditional bank for their primary banking needs. But, given how narrow that majority is, it’s clear that banks are at a cross-roads and the need to adapt is growing.

Properly leveraging the data that banks have access to is the key to providing a personalised experience, and this is where the clever application of technology for a bank’s payment processing systems is required.

Billions of payment transactions around the world each day start in shops, ATMs and websites, that then get routed onto the Mastercard, Visa and UPI payment networks, where they in turn get redirected to an issuer-side bank for approval. This gives banks a treasure trove of valuable data sets at their disposal, which – if harnessed correctly – can provide insights into their customers and their spend behaviour.

Analytics-driven processors can arm banks with the tools to improve customer experience: a critical component for them to remain competitive in an increasingly diverse banking environment. Equipped with AI, embedded into their payment processing, banks will even be able to offer personalised products to consumers at point of spend, like a Buy Now Pay Later option or offering of insurance on a holiday a customer has just booked. Buy Now Pay Later is becoming incredibly popular in the UK, with 37% already using this service and take up growing 39% per year. However, the traditional banks and their legacy infrastructure prevents them from offering these services. The ability to provide such services will provide the traditional banks huge new revenue streams and at the same time provide their customers a service which makes a difference for them.

Through this, banks can bridge the gap between themselves and their customers and deliver the promise of customer centricity. In turn, this will enable them to lead the way in taking back market share from nimble competitors, take advantage of monetising personalised products and services and be fit for a digital age.

Survival of the fittest

The banking environment is changing rapidly, and the best adapted players will invariably survive at the expense of those that are not. While neo banks are currently driving this shift in the landscape, incumbents are more than equipped to survive and thrive. For the traditional banks, legacy processes are a product of their longevity and this historical presence offers trust – a valuable asset.

Initiatives such as Open Banking are kickstarting a data-driven era of hyper personalised banking services, that put customers front and centre. With more people switching banks than ever before, the incumbents can only retain market share for so long. If they wish to survive, banks need to harness enriched card data, to provide the tailored services customers need.

The time for banks to reflect and reconsider their ways of working has never been better.

About Author

Abe Smith is CEO at Paymentology, the global, cloud-native issuer payment processor that gives banks unrivalled access to real-time customer and card spend data. Abe is a highly experienced leader with 25 years of experience in leadership roles at different fintechs and financial services groups, including CEO at Dealflo; Geneva Partners and Proficient EU. This level of experience has allowed him to experience first-hand the challenge posed by neo banks, and spot opportunities in how incumbents can keep up.