Published by Wanda Rich
Posted on March 24, 2025
The banking industry is experiencing significant changes driven by the rapid adoption of digital technologies and shifting consumer expectations. What began as a ripple with the emergence of digital-only banks has evolved into a transformative wave of innovation, reshaping how individuals and businesses manage money. As traditional financial institutions and digital challengers converge, the focus is no longer on who’s winning—but on how the entire industry is being redefined.
As 2025 unfolds, the question becomes harder to ignore: who is leading the future of banking—neobanks or traditional banks?
The answer, however, is more complex than a simple comparison.. While neobanks continue to expand rapidly by offering speed, convenience, and customer-friendly digital experiences, legacy banks are investing billions into modernization, leveraging their scale and trust to maintain relevance. The result is an industry evolving at pace, where the distinction between old and new is less about origin and more about adaptability.
The Rise of the Digital Challengers
Neobanks are reshaping the financial services industry with remarkable speed. The global neobanking market, valued at USD 143.29 billion in 2024, is projected to surge to USD 3,406.47 billion by 2032, reflecting a compound annual growth rate (CAGR) of 48.9%, according to Precedence Research. This explosive growth underscores the rising appeal of digital-first banking models that prioritize convenience, accessibility, and speed.
Among the standout players, Revolut has emerged as a symbol of the sector’s scalability and ambition. In November 2024, Revolut announced it had surpassed 50 million customers globally, including 10 million in the UK alone.
Much of this momentum is fueled by neobanks’ ability to reach underserved populations. An estimated 1.5 billion adults globally remain unbanked, with an additional 2.8 billion considered underbanked—those with limited access to full-service financial products. Neobanks capitalize on this gap by eliminating traditional barriers like physical branches, lengthy onboarding, and high fees, offering instead mobile-first platforms that resonate with digital natives, gig economy workers, and financially excluded groups worldwide.
Traditional Banks: The Digital Transformation Challenge
Traditional banks are far from idle in the face of digital disruption. While often perceived as slower to adapt, many legacy institutions have invested heavily in digital transformation initiatives to stay competitive. However, the path forward has proven to be complex. According to McKinsey, only 30% of banks that have undertaken digital transformations have successfully implemented their strategies. Challenges typically stem from entrenched legacy systems, siloed operations, and resistance to organizational change—factors that continue to inhibit agility and innovation.
Despite these hurdles, progress is evident. Traditional institutions are increasingly succeeding in shifting customer behavior to digital channels. According to Alkami’s 2024 Digital Banking Performance Metrics Report, active digital banking users as a percentage of checking accounts reached 77% in 2024, up year-over-year. This growth demonstrates that while traditional banks may not move as quickly as their digital-native counterparts, they continue to leverage their scale, regulatory credibility, and established trust to adapt and compete.
For many incumbents, the goal is not simply to digitize existing services but to reimagine them. From modernizing core infrastructure to integrating cloud-based solutions and AI, traditional banks are gradually learning to adopt more agile, customer-centric models without compromising compliance or risk standards. The result is a more competitive and hybrid financial ecosystem where innovation is no longer the exclusive domain of neobanks.
The Competitive Landscape: Where Strengths Are Emerging
Customer Experience
Neobanks have set new standards in digital banking by offering intuitive, mobile-first interfaces that allow users to open accounts, monitor spending, and manage finances with just a few taps. This level of ease appeals strongly to tech-savvy customers seeking convenience and speed. In contrast, traditional banks are still catching up, often hampered by legacy systems that can make digital interactions slower and less seamless. A comparison of customer experience between traditional banks and neobanks highlights the growing preference for the agility and usability of digital-first platforms.
Trust and Security
Traditional banks continue to hold a significant advantage when it comes to consumer trust. Their long-standing reputations, established regulatory frameworks, and physical presence provide a sense of security, especially for customers making high-value transactions or seeking in-person advice. Meanwhile, trust remains a barrier for neobanks, particularly among older demographics or in markets where face-to-face relationships still matter. According to the 2021 Banking Impact Report, only 7% of consumers and 8% of businesses said they trust neobanks more than traditional banks.
Innovation Speed
Freed from the burden of legacy infrastructure, neobanks can push updates and launch features at a rapid pace. Many offer cutting-edge tools like crypto wallets, savings automation, and budgeting insights far ahead of their traditional counterparts. Although incumbent banks face longer development cycles and internal approval hurdles, some are closing the gap. For example, Chase UK has topped digital banking satisfaction surveys, outperforming several digital-native competitors thanks to targeted innovation and strong execution.
Profitability and Sustainability
Traditional banks benefit from diversified revenue streams, established lending operations, and mature risk management practices—making them more consistently profitable. Neobanks, while often experiencing explosive growth, tend to focus on scale over immediate margins. However, recent findings suggest a promising future: a 2023 Bain & Company study revealed that neobanks are outperforming incumbents in Net Promoter Scores, signaling rising customer satisfaction and potential for long-term retention.
Ultimately, the competitive landscape is not defined by a clear winner in every category, but by a dynamic balancing act. Neobanks excel in speed, simplicity, and user experience, while traditional banks offer trust, scale, and financial resilience. As digital transformation continues to accelerate, success will hinge on how effectively each side can learn from the other—combining agility with reliability to meet the evolving expectations of modern banking customers.
The Challenges Both Sides Face
Neobanks' Hurdles
Despite rapid growth and strong user acquisition, neobanks face a range of structural and strategic challenges.
Regulatory Complexity
Operating across jurisdictions requires navigating a complex web of financial regulations. Unlike traditional banks, which have spent decades building compliance infrastructure, many neobanks must construct these frameworks from the ground up while keeping pace with evolving legal standards. The need to balance innovation with risk management is an ongoing challenge, especially in heavily regulated markets.
Customer Retention & Primary Use
While onboarding processes are fast and appealing, retaining users—and converting them into primary account holders—remains a persistent issue. Many consumers continue to treat neobanks as secondary accounts, relying on them for budgeting or everyday transactions while keeping their primary financial relationships with traditional banks. According to Galileo research, the majority of users in the U.S. still default to traditional banks for core banking services. This behavior limits average revenue per user and impacts long-term profitability.
Physical Absence & Trust Gaps
Neobanks’ cost advantages come in part from their absence of physical branches, which allows for lower fees and leaner operations. However, this model can alienate customers who prefer in-person service—especially in complex financial scenarios or in cultures where relationship banking remains important. Building brand trust remains one of the biggest barriers to mainstream adoption.
Cybersecurity Pressures
As digital-native platforms, neobanks must maintain robust cybersecurity standards without sacrificing usability. A single breach can significantly damage credibility. Continuous investment in security, fraud detection, and user protection is not optional—it’s fundamental.
Traditional Banks' Challenges
Legacy financial institutions face a different set of structural and cultural barriers as they adapt to a digital-first world.
Technology Infrastructure
Legacy technology infrastructure remains the Achilles' heel of traditional banks. These institutions often operate on core banking systems that are decades old, making integration with modern technologies complex and costly. Indeed, the numbers tell a sobering story—only about 30% of banks successfully complete their digital transformation projects. The majority struggle significantly due to the inherent complexity of modernizing outdated systems without interrupting their ongoing operations and services.
Organizational Culture & Siloed Structures
Organizational culture and resistance to change pose significant internal challenges. Traditional banks often struggle with siloed departments, hierarchical decision-making processes, and employees hesitant to embrace new working methods. This cultural inertia can slow innovation, making competition with agile neobanks difficult. The challenge extends beyond technology to encompass new approaches to customer service, product development, and risk management.
Cost Structures & Branch Networks
Maintaining large physical networks, operational staff, and legacy IT contributes to significantly higher cost structures compared to digital-only banks. As more transactions shift online, traditional banks must make difficult decisions around optimizing—or reducing—their physical footprint while still serving customers who depend on branch-based services.
Data Utilization
Traditional banks have access to vast amounts of customer data but often struggle to integrate and analyze it effectively. Without unified data platforms, offering hyper-personalized experiences—something many neobanks excel at—remains a work in progress.
Talent Acquisition
Traditional banks face significant challenges in attracting and retaining skilled professionals, particularly in high-demand areas like cybersecurity, AI, and data analytics. With growing competition from fintech firms and tech giants, incumbents must rethink compensation. While both neobanks and traditional banks continue to evolve, their respective challenges underscore the complexity of staying competitive in an increasingly digital world. The path forward will not be shaped solely by current capabilities, but by how well each can position themselves for the next phase of banking innovation. As the industry looks ahead, several key battlegrounds are emerging—areas that could define who leads in the years to come.
The Next Phase of Digital Banking
As the digital banking revolution progresses, the next phase of competition will be shaped not just by who adapts fastest, but by who innovates most strategically. Several key fronts are emerging where both neobanks and traditional banks are investing heavily to secure long-term relevance.
Artificial Intelligence and Automation
The role of AI in banking is set to deepen dramatically. By 2025, AI will play a central role in banking operations, powering everything from customer service chatbots to fraud detection, credit scoring, and personalized financial insights. Neobanks, with their agile infrastructures, are often quicker to deploy AI-driven features. However, traditional banks are rapidly investing in AI and automation to streamline operations and enhance customer engagement at scale.
Embedded Finance
The integration of banking services directly into non-financial platforms—such as e-commerce, ride-sharing, and software ecosystems—is redefining how and where consumers interact with financial tools. Neobanks often lead in this space due to their flexible APIs and cloud-native systems, allowing them to plug seamlessly into third-party environments. Traditional banks, while playing catch-up, are increasingly forming partnerships or developing Banking-as-a-Service (BaaS) capabilities to remain part of this evolving financial ecosystem.
Sustainable and Responsible Banking
Environmental, Social, and Governance (ESG) considerations are now a strategic priority for financial institutions globally. From green financing products to carbon tracking tools, both neobanks and incumbents are racing to meet growing consumer and regulatory expectations around sustainability. While traditional banks often lead in large-scale ESG financing, neobanks are innovating with tools that allow consumers to track their environmental impact or invest in socially responsible funds directly from their mobile apps.
Market Capacity and Coexistence
Despite the competitive narrative, the industry is far from a zero-sum game. The digital banking market was valued at $10.9 trillion in 2023, reflecting enormous room for growth across customer segments, technologies, and geographies. Neobanks and traditional banks are increasingly learning from one another—blending innovation with stability—to serve an evolving, digitally native customer base.
Looking Ahead
The future of banking will not be defined by whether an institution began as a neobank or a traditional bank—it will be defined by its ability to evolve. The most successful players will be those that blend technological agility with financial resilience, meeting customer expectations without compromising trust, compliance, or profitability.
As digital channels become the primary touchpoint for banking services, the line between incumbents and challengers will continue to blur. Traditional banks are modernizing at pace, while digital-first institutions are maturing into full-service providers. The industry is moving toward a hybrid model—one that combines the best of innovation and infrastructure.
In the end, the defining question will not be who started where, but who can deliver the most value to customers in an increasingly digital, data-driven, and customer-centric world. The digital banking revolution is not a battle to be won, but a transformation to be mastered.
