How Traditional Banks Can Compete with Fintech Disruptors

Over the past few decades, nearly every industry has felt the impact of technology disruptors – and traditional banks are no exception. The introduction of fintech has revolutionized modern banking by providing efficiency, lower costs and more user-friendly services at users’ fingertips via their smartphones and computers.

In 2021, record levels of funding poured into the fintech space, which has created a competitive threat for traditional banks as consumers begin to gravitate to digital banks in larger numbers. According to new research, the percentage of Gen Z, Millennial and Gen X consumers in the United States that consider a digital bank to be their primary checking account provider has more than doubled; and the percentage of Gen Zers whose primary checking account is with a top tier global bank has dropped from 35% in 2020 to 25% in 2022.

Traditional banks are now faced with having to adapt their products and services based on evolving digital consumer expectations. As more people rely on digital banks, how can traditional banks counter these competitive threats and better position themselves in today’s challenging and hyper-competitive market?

Expand digital offerings

In order to overcome fintech competition, traditional banks must embrace change and mobile banking. Traditional banks must rely on their expertise, know-how, client knowledge and resources to deploy new technologies to keep up with changing consumer expectations and remain competitive. A few ways they can do this include:

• Enhance digital banking. Over the next decade, more and more banks will close part of, if not all, their traditional physical branches and divert resources to improve the client experience through revised financial advisory services, greater personalization and more digital banking services. Digital banking services allow consumers to make transactions and handle other banking activities online or through apps. Consumer expectations are evolving, and many are looking for bespoke services and the most up-to-date offerings that provide real-time analytics and transactions. As such, traditional banks should ensure their infrastructure is up to date so that their customers can access their accounts in real time. But furthermore, they should invest in the UX (User Experience) and develop easy to handle Apps and online account management. The front end is as important as the back end. Going beyond providing an effective and reliable service, to providing a banking experience is what banks should aim for.
• Lean into artificial intelligence. Artificial intelligence (AI) can help traditional banks to improve the client experience, by leveraging data to anticipate their needs and provide bespoke solutions, such as introducing wealth management services for the entire customer base. Adopting AI can help serve customers better but also faster, during a time when their demands and expectations are quickly changing. AI would also help to reduce costs by increasing productivity and improving banking services pricing.
• Embracing the cloud. Cloud technology can transform traditional banks by evolving their current data systems, Integrating cloud services allows traditional banks to better manage the vast amount of consumer data they handle, increase the speed of data processing and improve legacy system capabilities. Companies like Xero, a global cloud-based accounting software organization, have begun to roll out features such as bank reconciliation predictions, which use machine learning to reduce manual data entry and save businesses time. Historically, traditional banks have been reluctant to move to the cloud due to data security and compliance concerns. But to be forward-looking and compete with fintech companies, traditional banks should consider working with an advisor to determine the best route to migrate their systems or applications to the cloud.

Optimize the overall customer experience

Traditional banks must be forward-looking and determine what kind of competitive offerings fintech companies are deploying to maintain and recruit customers. Advancements in technology and the Covid-19 pandemic-accelerated customer behavioral shifts and expectations. In order to successfully adapt to the times, traditional banks should focus on improving their customers’ experiences to successfully align with their needs and expectations. Here are a couple of recommendations:

• Buy now, pay later. Buy now, pay later (BNPL) took off during the pandemic, and has now become an attractive payment method for consumers looking for simplified financing without having to face high-interest rates or credit scoring issues. Banks have the opportunity to become go-to solutions providers in this space, given recent data that shows 70% of current BNPL users would be interested in using BNPL plans from their banks if they were available. As such, traditional banks should explore what it takes to implement this service, to meet consumers’ expectations for reliable payment methods.
• Contactless payment. The pandemic drove customers to increasingly use online shopping and contactless payment. The development of Apple, Google and Samsung payment along with electronic wallets facilitated the move from cash and credit card payments to one click and contactless payment. Banks remain a key actor in the payment systems infrastructure, given banks are the largest issuers of debit and credit cards. Providing an efficient yet smart payment management tool connecting the digitalized credit card allows the client to manage their budget and wealth on a 360 basis. Additionally, connecting the credit card to the brokerage, investments and saving accounts, and real time financial advisory would provide an improved client experience that should be able to keep up with innovative solutions.

For traditional banks to keep up with changing customer needs and retain a competitive edge against fintech disruptors, they should focus on investing in the proper technologies and improving the general user experience. The traditional banks that are digitally agile, data-savvy and customer-centric are those that will survive and thrive.