Is it time for banks to turn and face the change?
As I write this, my mobile is pinging with the news that Revolut has been granted a banking licence in the UK. I had started the article beforehand, but the timing is impeccable.
Legacy banks have to make serious decisions about the future
Forgive me for starting with a cliché, but I believe the following is very apt when I think about the current state of traditional retail banking.
To boil a frog, gently place it in a pot of pleasantly tepid water and turn the heat on low. It will float there placidly and slowly cook to death. If you drop a frog in boiling water, it will frantically try to clamber out.
Traditional retail banking is currently gently simmering. It was dropped into a saucepan of digital possibilities 30 years ago and has benefited since then from the warm opportunities of digital transformation. Digitalisation and automation have created efficiencies and costs have been lowered enormously.
But the water is now starting to boil, and changes are happening – environmentally, socially and technically. We stand at a moment in history when legacy banks have to make serious decisions about the future.
The question is, what will the banks do? The time has come for them to adapt. To paraphrase David Bowie, banks must turn and face the change. If they stay where they are, they face an inevitable demise.
So, what are some of the things that are turning the heat up on traditional banks?
1) Choice
Customers today have much more choice. In the UK market, for instance, a wide array of banking options is available to consumers.
According to Mintel, traditional banking providers continue to dominate the market. 72% of UK consumers still have current accounts with the ‘Big 4′ banking groups (Barclays, Lloyds Banking Group, NatWest Group and HSBC).
However, according to Finder, 40% of UK citizens now have digital-only accounts. Customers have discovered they don’t need to switch to benefit from the products, services and functionality of neobanks. People are increasingly using them for specific functions and giving multiple providers a go – Monzo for day-to-day spending, Revolut or Zing for spending abroad, and Chase for savings, for example.
Mobile wallets mean that physical cards are no longer a must, and as people have gotten used to using apps in a task-driven way, having a few apps for finance rather than an “everything app” is not a significant psychological burden. Apps are disposable. If a particular app doesn’t work for them, users bin ’em.
Meanwhile, the traditional banks sit there, slowly becoming zombies, as paycheques go in and money goes out straightaway into a neobank. This behavioural shift is gradually eroding the traditional bank business models.
2) Physical connections are disappearing
Many high-street banks are closing branches, removing the ‘solid’ reminder of their presence from the consumer. I remember researching why people chose to bank with a particular institution. Physical presence was often cited as a critical reason. Branches physically embody a bank. Their visibility reminded customers of the institution’s stature and, at the back of every customer’s mind, offered a place to go if everything else failed. No branches, no physical reminder.
The disappearing ‘physical’ problem is further exacerbated by the fact that people are increasingly using mobile wallets. The bank card, the last vestige of a bank’s physicality, is no longer the primary payment tool. That valuable flash of branding and touch people had as they made payments will soon be gone.
3) Atomisation
Banking is being opened up, ‘cloudified’ and embedded. I recently spoke with Noah Sharp, CEO of Vodeno, who told me he believes that consumer trust and stickiness with traditional banks is waning, especially among younger demographics.
Innovative companies are leveraging this trend by offering financial services through well-known brands, thereby enhancing customer loyalty. He gave the example of Germany’s Metro AG, which provides customers with a decoupled debit card and Allegro’s cashback wallet. Both are successfully creating closed-loop systems that incentivise spending within their ecosystems.
These solutions are not just about convenience. They represent a strategic move to reduce transaction costs and deepen customer engagement. Integrating financial services into non-financial platforms, such as retail and tech companies, allows brands to offer personalised financial products that resonate with their customer base. This approach strengthens brand loyalty and opens up new revenue streams for businesses by embedding financial products directly into their customer journey.
Big brands need to find ways of building customer loyalty, and make no mistake, they will see financial services as a way of doing this. It is so entirely logical. Most companies are suffering from the ephemeralisation impact of digital as their physical touchpoints disappear. Brand stickiness is becoming everything.
Unsurprisingly, many neobanks have seen the light and have been developing BaaS propositions, such as Engine, born out of Starling. They are also joined by a few legacy banks, such as Standard Chartered with Audax and NatWest with Boxed.
For legacy banks, this decoupling of product and distribution is a massive opportunity. They can turn, face the change, hop out of the water, embrace BaaS, and be embedded. Knowing banks, there will be a lot of hedging at the moment when focus is required!
About the author
Dave Wallace is a user experience and marketing professional who has spent the last 30 years helping financial services companies design, launch and evolve digital customer experiences.
He is a passionate customer advocate and champion and a successful entrepreneur.
Follow him on X at @davejvwallace and connect with him on LinkedIn.
