In recent years, neobanks have emerged as formidable challengers to traditional banking institutions. With digital technologies at their core, neobanks such as Chime, SoFi, Revolut, Starling Bank, N26, Current, and Nubank have disrupted the existing state of in-person banking. Leveraging data analytics, big data, cloud computing, robotic process automation (RPA), and artificial intelligence (AI), these digital-only banks have revolutionized the customer experience and are actively stealing market share from legacy players.
In response, legacy banks have launched their own digital banking subsidiaries or strategic business units (SBUs) to compete in the digital landscape. HSBC's First Direct and Scotia Bank's Tangerine are examples of incumbent-owned digital banks. Additionally, there has been a broader industry-led shift to reduce physical branches as customer preferences shift towards more convenient digital offerings. Despite the rise of neobanks, legacy banks have maintained their position through brand recognition and a loyal customer base. As we enter 2024, the power struggle between neobanks and legacy banks intensifies. In this article, we will explore the potential landscape and key factors that will shape the competition between these two banking models in 2024.
The Neobank Perspective: Consolidation and Scaling Up
While neobanks have posed a significant threat to traditional banks, industry exerts believes that neobanks will face challenges in the coming years. These challenges can be attributed to the impact of COVID-19 and cost-of-living-induced slowdowns, which have slowed down the growth of neobanks. However, as the economy gradually recovers, neobanks will consolidate and scale up their operations to regain momentum.
The Battle for Customer Experience
In the banking industry, the key battleground for neobanks and legacy banks is providing the best customer experience (CX).
While brand ambassadors and tone of voice are important aspects of brand experience, customers ultimately care about the outcome of their interactions with a bank, particularly when it comes to financial matters. The quality of a bank's products plays a crucial role in shaping customer experiences. Personalization and affinity to customers' daily lifestyles will be key factors in delivering better customer experiences.
Improving Efficiencies: The Role of Back-Office Operations
Efficiency is a pressing concern for banks in the current economic climate. In a high-rate market, banks must keep margins intact by focusing on cost reduction. To achieve this, banks of all kinds can leverage Generative AI platforms and large language models (LLMs) to streamline back-office operations.
Seamless integration and automation are the prerequisites to any efficient banking system. Integrated systems and task automation offer numerous benefits, including time-savings, higher levels of personalization, and increased customer satisfaction. By automating repetitive tasks, bank employees can focus on building stronger connections with customers.
Digitization across the value chain, particularly in the back-office, is crucial for banks to stay competitive. A well-defined digital strategy, executive buy-in, talent alignment, and a dedicated flow of capital are essential for successful digital transformation. Prioritizing customer outcomes and understanding customer intent are key to aligning back-office efficiency with front-office initiatives.
Innovation across both front and back-office operations is critical for a holistic digital approach that cuts costs. While neobanks have had an advantage in this area, legacy banks are catching up by realizing the significance of digital transformation. With their larger scale and brand recognition, legacy banks have the potential to leverage their strengths and narrow the gap with neobanks.
Conclusion
As the battle for banking supremacy intensifies in 2024, neobanks and legacy banks are making strategic moves to outmaneuver each other. Neobanks will consolidate and scale up their operations, pushing for additional market share. Legacy banks will invest in their digital capabilities to catch up with fintechs while exploring partnerships with niche fintechs to offer innovative products and services.
Customer experience remains a top priority for both neobanks and legacy banks. Convenience, efficiency, security, and personalization are key factors that banks must address to meet customer expectations. The quality of banking products and the cost of those products play a significant role in shaping customer experiences.
Efficiency is crucial for banks to stay competitive in the current economic climate. Back-office operations must be streamlined through automation, integration, and the use of AI platforms and large language models. By improving back-office efficiency and digitizing across the value chain, banks can reduce costs and deliver better customer outcomes.
In the race for banking supremacy, neobanks and legacy banks will continue to innovate and adapt to evolving customer needs. While neobanks have disrupted the industry, legacy banks have the advantage of scale and brand recognition. The outcome of this competition will depend on each bank's ability to provide exceptional customer experiences, leverage digital technologies, and improve operational efficiencies.
