Opinion Digital Banking

Big banks are stuck in limbo

Traditional banks are caught between two distinct eras, unlike their digital banking competition.

Governance (Michał Jakubowski on Unsplash)


It’s certainly a challenging time for banks’ customers. Many people are struggling with a period of financial hardship and are now looking to their banks for help.  

Of course, banks must rightly focus on offering day-to-day support for customers now. They must also continue to transform and move forward – for the good of all their stakeholders, customers included. 

Maintaining a long-term view while managing through short-term pain is a challenge for all banking Executives.  As we have previously noted, we observe that traditional banks and digital-only ‘neobanks’ have been on the road to convergence

They are both striving for a target state that combines a deep and broad balance sheet, with the digital-first experiences and technology that reflect the era we live in.  

Traditional banks caught between theold’ and ‘new’ eras

For the larger high street banks, this new reality means they are increasingly finding themselves caught between two different eras of banking. 

Incumbents maintain a strong presence in the ‘old era’ with legacy operations reminiscent of banking in the 80s, 90s and 2000s.  

Characterised by mainframe technology, linear business models with control embedded everywhere, this consumes significant resources, both in terms of talent and investment.

At the same time, banks are also pushing forward in the ‘new era’.  

This includes further digitising their operations, implementing advanced tech such as generative AI, and focussing on experience and digital engagement as a differentiator rather than more traditional product-based marketing. 

Managing across both eras, whilst also accelerating the shift from old to new ahead of the competition, is a difficult balancing act. 

The techniques, tools, technologies, and skills required to manage the old are inevitably very different to those required to manage in the new.  

Executives must ruthlessly manage the part of their business in the past because, for most banks, this remains the major contributor to financial performance. 

However, ignoring the future won’t satisfy shareholders and is certain to see you falling behind the competition and causing financial stress down the line.  

Neobanks face their own challenges and barriers to scale

The neobanks are clearly at an advantage.  Born in this new, digital era, they don’t have a past to confront.  But they face their own challenges.  

Many lack the broad and deep balance sheet that is critical to profitability in everyday banking, particularly in a heightened rate environment. 

As we see more ‘money in motion’, with customers seeking out yield, the pressure on neobank balance sheets is increasing.  

Despite their unrivalled user experience, capacity for innovation, and low cost to serve, they face ‘barriers to scale’ where their incumbent competition faces ‘barriers to change’.

A tricky transition for incumbents

For now, the big banks are certainly benefitting from their scale and diversification.  With the net interest margin (NIM) tailwinds that have coincided with rising rates, their financial position is secure, for now.  

Already, though, competitive pressure is evident on both sides of the balance sheet. With NIM expansion likely to have peaked, significant pressure is set to return.  

And so, traditional lenders’ attention will return to accelerated transformation and a shift to the new era to secure their future in the competitive everyday banking marketplace. 

Of course, banks know this and are already working at pace to make this shift.  

But the reality is that they are managing on three fronts.  Firstly, they must manage the activity still grounded in the past.  

Secondly, they must double down on the right investments in the new.  

Finally, they must accelerate the shift from past to new, ensuring they don’t leave a costly and messy stranded set of processes, policies, technologies and activities behind.


The views and opinions expressed are not necessarily those of AltFi.

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