Neobanks vs Legacy Banks: Drawing the Battle Lines in 2024

Since the mid-2010s, neobanks have risen to the mantle as the great challengers to household banking institutions – the likes of Monzo, Revolut, Starling Bank, N26 and Nubank are now well-established names in our industry.

Offering digital-only services, neobanks have defied the status quo of in-person banking, leveraging an open ecosystem approach with digital technologies at their core. 

Data Analytics & Big Data, Cloud Computing, Robotic Process Automation (RPA), AI & ML – among other digital innovations – are at their heart, as neobanks look to steal market share away from legacy players with improved customer experiences.

As neobanks have grown in stature, legacy banks have responded by launching or scaling up digital banking subsidiaries or strategic business units (SBUs). Examples of incumbent-owned digital banks include HSBC’s First Direct and Scotia Bank’s Tangerine. 

There has also been a broad industry-led shift to reduce branches in towns and cities – as customer preferences shift to more convenient digital offerings. 

As traditional banks continue to adjust, it’s their brand recognition that has held them firm among loyal customer bases. 

Now that we enter 2024, we look at where the power struggle will be fought in the battle between neobanks and legacy banks. 

Neobanks vs legacy banks: How will things shape up in 2024?

While the threat of neobanks has loomed large over their traditional counterparts for some time, Shuvo G. Roy, VP & Head of Banking Solutions, EMEA for Mphasis believes they will only step up the challenge. “We will also see some consolidating defensive moves by traditional banks and their digital avatars,” he adds. 

For Roy, neobanks have not had the kind of traction they would have hoped for over the last two years, slowed down by COVID-19 and cost-of-living-induced slowdowns. As the economy continues its gradual recovery – in what is still set to be a volatile 2024 – “we will not see too many new players come up and may also see some consolidation,” says Roy. 

“The larger neobanks will scale up and push for additional market share, sometimes rebalancing the equation between themselves too, as opposed to against traditional banks alone.”

However, Kin + Carta Europe’s Financial Services Director Phillip O’Neil expects the competition to be fiercer in 2024. “There will be a reckoning between competition, partnership and acquisition,” he notes. 

“I anticipate we’ll see digital banks like Monzo, and neobanks like Revolut, continue to build out their product set to compete with legacy banks. And legacy banks will continue to play catch up to fintechs, investing in their product features, and enabling customers to manage their money better. 

“We’ve seen a lot of legacy banks offer transaction categorisation and saving goals spaces, ideas that we have seen before from fintechs. It will also be interesting to see who starts offering fraud call checkers – like Monzo has – in the new year.

“Open Banking makes it easier for legacy banks to offer these specific features without building them into their existing infrastructures, allowing them to innovate and eventually leapfrog those that they are chasing. 

“It’s too early to say whether neobanks will be able to scale enough to seriously threaten the stability of legacy banks – but it’s not out of the question.

“On the flip side, I believe we’ll see more partnerships between niche fintechs and legacy banks - think the Natwest and Cogo partnership - which will enable legacy banks to offer more innovative products and services to their customers.” 

The battle for customers: Offering the best experience

Today, the battle between banks is all about offering the best customer experience (CX), with product suites designed with the customer at heart. 

For Oriana Ascanio, Client Development Manager for the UK & Ireland at Foundever, banks will continue to battle for the needs of the customer – “convenience, efficiency, security, and personalisation” all among them. 

“As we continue to see branch closures taking place, the focus increasingly shifts towards banks’ overall service proposition,” says Ascanio. 

“I’m not just talking about whether a bank has an app, or how long it takes them to answer the phone, instead it comes down to the policies, processes and systems in use being aligned with customer expectations. 

“When people think of brand experiences, they often think about speaking with a brand ambassador and their tone of voice and attitude, but the reality is that while those things are important, what customers really care about is the outcome of their interactions with a brand, especially when it comes to money.”

Indeed, the outcome of a consumer’s interaction with a bank is dependent on the product(s) a bank employs, and the quality of a product is, inevitably, dependent on cost. 

As O’Neill puts it: “Customer experiences are improving across the board, and banks now have to compete with the customers' last best digital experience – whether that experience was with a financial product or not. 

“Better customer experience often means more personalisation, and with increased consumer awareness of the capabilities of AI, customers will be demanding more personalisation as well as closer affinity to their daily lifestyles. 

“One of the key challenges is going to be how to use data to offer better, more personalised experiences to customers while making sure those experiences are useful and that personalisation doesn’t come across as invasive.”

This sentiment is echoed by Roy, who adds: “Banking is about money, at the end of the day. And when it comes to products like loans, the cost of the product matters as much as the customer experience. 

“Especially in the current financial climate (through the cost of living crisis and high inflation/rate regime that we are likely to witness over the next few quarters) it is all the more important to make the underlying product more attractive.”

Banking in 2024: Improving efficiencies 

Of course, with a better product comes better prospects of meeting the demands of customers – many of whom frequently experience the supreme user journeys of large tech and commerce firms – namely the likes of Google, Amazon and Apple. 

But, in today’s macroeconomic environment, disposable cash to invest in new products and services is hard to come by: particularly as venture capital consolidates following the post-pandemic funding spree in 2021-2022. 

This is where back office efficiences step in to cut unnecessary costs. For banks, making back-end processes more cost-effective has become increasingly important.

As Roy expands: “The need for efficiency has increased as the pressure on operational costs operations has grown significantly. Per-person productivity pressures have increased and so has the continuous focus on the reduction of costly errors. The need to keep margins intact in a high-rate market has caused additional focus on keeping costs low.”

In 2024, it will be increasingly important for banks of all kinds to leverage Generative AI platforms and Large Language Models (LLMs) to keep operational costs down. Those that do will have increased scope (depending on size, assets and revenue) to innovate the products and services their customers desire.

Ascanio, too, feels the need to drive efficiencies will be crucial to banking success: “Back-office efficiency, seamless integration, and automation have never been more important,” she says. 

“When implemented properly, integrated systems and task automation both bring a myriad of benefits to the bank, its customers and employees alike. 

“For the customer, they bring time-savings and usually higher levels of personalisation and satisfaction. For the agent, they bring higher accuracy and by removing some of the more repetitive tasks, they give them the time to really focus on the human connection with the customer.”

Furthermore, for O’Neill, banks behind the curve on efficiencies need desperately to implement the right digital strategies to improve cost reduction processes. He notes: “Advancing on the digital maturity scale requires financial institutions to digitise across their value chain, the heart of which is in the back-office. 

“Progression along the curve and reaping the benefits of digitisation is underscored by a well-defined digital strategy that spans across the value chain, has executive buy-in, a talent pool aligned to the capabilities required, and a dedicated flow of capital. 

“The winning financial institutions won’t fall prey to the lure of short-term profit and will, rather, see the transformation as a way to strategically position themselves to be market leaders – being laser-focused on delivering customer outcomes and truly understanding the customer intent over-delivering projects is at the heart of this. 

“Aligning initiatives with a robust digital strategy centred around supporting the customer will inadvertently prioritise back-office efficiency as a way to support those winning front-office initiatives.”

Playing hand-in-hand, innovations across the front and back office are critical to driving a holistic digital approach, cutting costs all the while. 

Of course, this is an area where neobanks have the upper hand. But, as legacy banks continue to realise the significance of digital transformation, they will leverage their greater scale and brand entrenchment to catch up with their neobank counterparts. 

As for neobanks, the mission in 2024 will be to continue offering new products and services to stay one step ahead – taking as large a share of customer and market share from their traditional rivals as possible.

In 2024, the race between neobanks and legacy banks for success is on. 

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