Banking has been full of disruptive developments lately. Across global markets, agile fintech startups are harnessing digital channels and going to market with everything from simple, hassle-free banking platforms and services to complex investment products. In Europe, incumbent banks still hold pole position, but that might not be the case forever.
Today, 23% of traditional banking customers hold a neobank account, and that number is growing. The fact that Revolut, a neobank headquartered in the UK, has amassed 30 million1 account holders over less than a decade, across the globe, shows us that banking is at the precipice of a major shift.
Undoubtedly, neobanks are more specialized. They certainly don’t offer the full spectrum of software for financial services & products that traditional banks bring to the table. But they don’t need to.
Today, more and more customers are moving away from brick-and-mortar banking systems and their associated experience and instead clamour for the seamlessness and personalization of mobile technology and relevant software for banking.2 By 2022, there were 162 digital banks in Europe.3
| European Neobanking in A Nutshell | ||
| Number of European Neobanks in 20224 77 | Projected User Base In 20265 128 million | Market Growth Rate 2020 – 20266 45.9% CAGR |
Given that neobanks are completely digital , they prioritise consumer experience and anytime availability. value-added services l(VAS) like smart savings plans, budget setting tools, business growth software and financial literacy apps become differentiated and the first stop for any young adult.
What is therefore preventing the Banks from creating a digitally-focused future? In Europe, there is inertia and exhaustion and they are hesitant to modernize their Core systems for several reasons. A key reason is ROI.
Digital Transformation – Risk & Return on Investment
The legacy top core Banking software systems are often unique to a bank’s specific offerings and processes. They are often expensive to migrate, especially when considering that regional compliances and product nuances have to be baked into any transformation initiative. Last but not least, there is always a fear that the pace of technological change could outstrip the value of their new systems within a short period.
Digital Core banking solutions’ modernization dilemma, and possible solution, lies in understanding composable architecture and its potential leverage. Composability allows banks to quickly modernize, by cherry-picking system components to upgrade, instead of taking a monolithic approach to their core overhaul.
Composable platforms are highly modular and enable products and services to be quickly built, bundled, and rolled out to market, without disrupting legacy processes. This means that updates can be progressively launched on a granular scale, letting users comfortably adjust to each new change in UX instead of being overwhelmed by new features. Most composable banking systems are built with open API-based integrations at the fore.
Using multiple vendor modules on a plug-and-play basis limits vendor lock-in and eliminates the need for specialized integration teams, and makes product launches much more cost-effective. Furthermore, a composable architecture can help the bank evolve into an ecosystem by leveraging APIs. Bringing the massive customer base of traditional banking and the agile operations and digital insight of neobanks is a win-win proposition for Customers, Banks & FinTechs.
As the pace of market evolution accelerates, banks and their software architectures must be more adaptable and agile than ever. Not only do composable systems allow for a lower overall TCO, but since individual components can be enhanced or changed rapidly as needed, it also presents a quick route to future-proofing. This, in turn, allows banks to quickly align back-end systems with new product offerings and rapidly take advantage of emerging market opportunities.
1. “About us | Revolut.” Accessed August 25, 2023. https://www.revolut.com/about-revolut/.
2. https://www2.deloitte.com/content/dam/Deloitte/de/Documents/financial-services/Banking_Trend_Radar.pdf
3. “European Digital Banking Landscape – BPCBT.” Accessed August 25, 2023. https://www.bpcbt.com/blog/european-digital-banking-landscape.
4. https://neobanks.app/europe
5. https://www.statista.com/outlook/dmo/fintech/neobanking/europe#transaction-value
6. https://www.reportlinker.com/p06021862/Europe-Neobanking-Market-By-Account-Type-By-Application-By-Country-Industry-Analysis-and-Forecast.html#:~:text=The%20Europe%20Neobanking%20Market%20would,period%20(2020%2D2026).
Authors
Raju Daryani, Business Head, Digital Core, iGCB, Intellect Design Arena
K Srinivasan, President & Regional Head- Europe & UK, iGCB, Intellect Design Arena
