Digital Transformation: How Banks Can Compete with Fintechs

Fintechs don't reach success and profitability as fast as they would like, but banks are losing success and profitability faster than they like. Fintechs are born digital: banks are trying to get there while upgrading their legacy systems and keeping their customers happy. There's hardly an established bank in the world that's not going through a digital transformation.

Retail banks are under pressure from rising customer expectations, aggressive competition from digital banks and fintechs, and a rapidly evolving technology landscape. So digital transformation is a necessity and an opportunity but it presents a range of complex operational and strategic challenges. For many incumbent banks, navigating these challenges while retaining customer trust and profitability is proving difficult.

The Culture and the Talent

It's well established that culture and talent are central challenges in digital transformation. Many banks don't have the internal digital skillsets required for transformation, especially in areas like data science, UX design, and agile product development where they're competing for talent with fintechs and big techs. At the same time, cultural resistance and risk aversion within large institutions can slow down innovation and transformation efforts. This contrasts sharply with fintechs, which are built around experimentation, speed, and user-centricity.

Many traditional banks continue to rely on old core banking systems that are inflexible, expensive to maintain, and poorly suited to the fast-paced demands of digital service delivery. These systems create bottlenecks for innovation, making it hard for banks to quickly roll out new products, automate processes, or integrate with APIs that are standard in fintech ecosystems.

In contrast, fintechs and digital banks are built on modern, cloud-native architecture that allows them to launch features rapidly, scale cost-effectively, and harness real-time data. Traditional banks find themselves unable to match this agility, and this technological inertia translates into a poor user experience. Customers increasingly expect frictionless, intuitive digital experiences, and they get frustrated when banks fall short of the user experience standards set by fintechs and big techs.

Data Management and Analytics

Another major challenge lies in data management and analytics. Banks have great troves of customer data, but too often this data is siloed, outdated, or underutilised. (You'll have read how banks such as NatWest are hiring consultants in to unify their siloed data.) Meanwhile, digital challengers excel at using data to personalize services, assess creditworthiness, and drive customer engagement. Without these integrated and intelligent data systems, incumbent banks struggle to turn insights into action.

Finally, there is the challenge of customer perception and brand relevance. Customers now expect seamless, real-time, and personalized experiences through standards set not just by fintechs but by Amazon, Ant and Apple. Banks risk losing market share if they can't meet these expectations or if their brand is seen as outdated.

Solutions and Strategic Responses

Critically, transformation should not be siloed in IT departments. It must be led from the top, with bank leadership taking an active role in embedding a digital-first mindset and culture. This way, banks can reimagine the customer journey end-to-end, integrating channels, making onboarding simpler, and using data to anticipate and meet customer needs.

Modernisation of the core banking infrastructure is essential, whether that's through cloud migration, core banking replacement, or a gradual 'hollowing out' of legacy systems in favour of microservices and APIs.

Banks must also build strong internal capabilities in data analytics, artificial intelligence, and customer experience design. Investing in internal talent pipelines and partnering with external innovation hubs or fintechs can accelerate this process.

By embracing these changes, banks can close the gap with digital challengers. That's when we'll see banks able to leverage their trust, scale, and regulatory expertise to deliver a differentiated, future-ready banking experience.

How Retail Banking Institute can help

At the Retail Banking Institute, we work with banks on exactly these challenges. Our programmes are built around the core principle of building a modern, customer-centric digital retail bank.

Through leadership programmes, digital transformation training, and practical toolkits built for real-world banking, we help financial institutions accelerate their transformation journey, and compete with confidence. Let's build the digital bank your customers are already expecting.

Email Caroline.Hastings@lafferty.com to arrange a conversation and let's see how we can accelerate your transformation.