Digital banking is increasingly significant in the global economy. It is projected to grow fourfold and reach a size of $57.35bn by 2033. This is unsurprising, considering that most bank users do all their banking operations online. While some use digital tools provided by traditional banks, some users are inclined to open accounts in digital banks. Roman Eloshvili writes

Indeed, many traditional banks feel the rising competition from digital banks and recognise the need for digital transformation, so they are beginning to implement their online solutions.

Neobanks increasingly attract customers accustomed to conducting all their banking operations via mobile devices. The convenience offered by these digital-first banks is reshaping customer expectations and behavior, forcing legacy banks to accelerate their digital strategies.

Moreover, the projected annual growth rate of 12% in the online banking sector is a compelling incentive for banks to advance their digitalisation efforts. This transition reflects the increasing acceptance of digital banking among consumers. It highlights the critical role that digital transformation plays in a bank’s ability to remain competitive in a rapidly changing financial landscape.

Four problems that banks face today in implementing online banking

1. Competition with neobanks. Traditional banks are under growing pressure from neobanks built with digital-first approaches. These competitors often offer more user-friendly, technology-driven services that appeal to a digitally savvy customer base, making it easier for traditional banks to retain and attract customers with significant digital enhancements.

2. Adoption of advanced technologies. Integrating advanced technologies such as cloud solutions, APIs, and automation systems presents both an opportunity and a challenge. While these technologies can significantly improve efficiency and customer experience, they require substantial upfront investment in skills and infrastructure, which can be a barrier for many established banks.

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3. High costs of implementation. Developing in-house solutions and subscribing to Software as a Service (SaaS) platforms involve considerable expenses. These costs are often calculated in millions annually, covering digital banking systems’ development, deployment, and maintenance. For many banks, these costs require careful financial planning and prioritisation over other investments.

4. Legacy system integration. One of the most daunting tasks for traditional banks is integrating new digital banking technologies with their core banking systems and other legacy internal products. These systems often need to be updated and designed to synchronise with newer technologies, making integration complex, time-consuming, and resource-intensive.

How can banks facilitate their digital transformation?

The data shows that it is time to develop. Fintech companies and digital banks dominate the opening of new current accounts—in the first half of 2023, these companies accounted for 47% of new accounts opened, compared with 36% in 2020. Why? Not because they are digital but because they offer the best and the most convenient digital products.

As Picasso famously remarked, “Good artists copy, great artists steal.” So, I suggest examining neobanks and borrowing ideas like an artist. Utilize the strategies that have been proven effective. Banks can either develop their solutions or buy ready ones from the market—it depends. Nonetheless, striving to create your unique perspective may lead to groundbreaking ideas that drive success in the ever-evolving finance landscape.

To stay ahead in the banking sphere, it’s crucial to integrate advanced technologies like AI and machine learning. Understanding and adapting to new customer behaviors, such as the shift toward mobile platforms, is also essential. Banks can effectively operate in this dynamic market by embracing these innovations and aligning with changing consumer preferences.

Will the industry abandon “outdated banks”?

The shift from “outdated banks” is already underway, with only a few private banks expected to withstand the tide for a bit longer. Neobanks and institutions with solid online banking offerings steadily draw customers away from legacy banks, signaling an apparent demand for modernised financial services.

Legacy banks should explore new online banking platforms and develop solutions that are at least as good as, if not better than, those available on the market. Alternatively, they could adopt ready-made solutions. Shifting budgets toward technology development and digitalisation is crucial. A mobile-first approach, online functionality, and process automation are vital strategies for staying competitive.

Roman Eloshvili is a Founder and CEO of XData Group