Neobanks Notwithstanding, Traditional Banks Are Not Going Away

Has the time of traditional banks passed? Some people may think that’s
the case, referring to the steady popularity growth of the neobanks – a type of financial institution that operates online, having no physical branches. 

Just in Europe alone, the penetration of online banking among the EU markets amounted to 58% in 2019. And in Norway, Iceland, Denmark, Finland, and the Netherlands the number passed the 90% mark. [1] 

It won’t be a stretch to assume that in 2020 even more people turned to digital banks because of convenience and/or safety reasons.

The examples are many: the lockdown prompted British citizens to use banking apps, with 54% of people surveyed in July said it’s a regular thing for them now. [2]

Meanwhile, in April stimulus payments helped increase the mobile banking registrations by 200% over the daily average a month prior. [3]

All in all, the size of a global online banking market is expected to more than double: from $9,1 billion in 2019 to $20,5 billion by 2026, as the demand for banking services among younger customers, who are more up to speed with the latest technological advances, will grow. [4]

The reasons people are choosing neobanks over the brick-and-mortar ones are pretty common.

For instance, the 2017 survey conducted in Italy, and the 2020 British survey pinpoint the few main justifications for using digital banking: the convenience of online services, better rates, and economic conditions.

The seamlessness of digital banking services is what they are famous for in the first place – for instance, using Genome, a person or a business can manage their finances online, from the convenience of their houses and offices.

You don’t need to waste time visiting banking branches, which in 2020 has also become a matter of safety.

As for more beneficial rates, traditional banks usually charge more for their services, while Fintech companies offer higher interest rates and bonuses to attract more new clients. [5,6]

Still, all the factors listed are not enough to erase the impact traditionally
banks still have on the financial industry.

Remember, lots of brick-and-mortar have decades or even hundreds of years of development behind them, making them a lot more reputable and trustworthy, than newly emerging Fintechs.

They also offer clients loans and mortgages and can work with businesses of different sizes, which most of the neobanks can’t afford.

The capital assets are another crucial argument in traditional banks’ success. As data shows, right now the Industrial and Commercial Bank of China (ICBC) is the largest bank by assets, which amount to over $4.3 trillion. In a matter of fact, every bank from the top 10 of the said list has over $1,95 trillion in assets. [7]

The European banks don’t fall behind either: compared by total assets, the UK’s HSBC Holdings (€2,4 trillion), French BNP Paribas (€2,1 trillion), French Credit Agricole (€2 trillion), Spanish Banco Santander (€1,5 trillion), and French Societe Generale (€1,3 trillion) are in a top 5. [8]

If compared by market capitalization, the ICBC reported $1714 billion in the second quarter of 2020.

Among other banks like JPMorgan Chase and Bank of America, the index reached $287 billion and $206 billion accordingly in the second quarter of the year.

Consider, that the pandemic hit the traditional bank industry hard, as in the fourth quarter of 2019 the market capitalization index of three said banks amounted to $2051 billion, $437 billion, and $317 billion accordingly. [9, 10, 11]

Though big traditional banks withstood the first wave of the pandemic, it
uncovered the many problems they have.

Not all brick-and-mortar banks were digitally ready when the lockdowns started: many banking branches closed, leaving customers unable to reach their banking manager.

As a result, people resorted to using e-banking apps, which were already perfect for a lockdown scenario – no need for branches’ visiting and faster operation performance than with traditional banks, all is required is to have a phone.

Some of the banks got to correct their mistakes: the survey of banks from
around 39 countries revealed that 34% of respondents had to implement
fully digital processes due to the pandemic, 23% enabled digital methods for identification and verification, and 18% even launched contactless payment methods. [12]

The need for digital services is a valid reason for people to switch from traditional to neobanks, especially in 2020, but all in all, people still prefer the good ol' banks for good customer service and an opportunity to see the manager in person. [6]

So, how do you solve the issue? It seems that taking the best things from
both worlds of traditional and e-banks is the best-case scenario, which can lead to cooperation between the two.

Brick-and-mortar banks can use their ample resources to invest in Fintech company, which in turn will provide the latest solutions for digital banking.

Following the innovations, while keeping up with the high-level customer support and remaining secure and trustworthy, is what traditional banks should gravitate to.

Also, as the 2019 research from Accenture uncovered, only 12% of analyzed banks were committed to a digital transformation, 38% sought
digitalization, but their efforts weren’t as evident, and a staggering 50% didn’t make much progress at all. [13]

That’s why, looking up to neobanks’ successful experiences from the technical point of view is something that will, hopefully, push the very needed change among old-fashioned banks, even if they aren’t considering cooperation with Fintechs.

For example, Genome is licensed by the National Bank of Lithuania to maintain that level of reliability with the technological advances of a Fintech startup.