The banking landscape, once steady and stable, has undergone a massive shake-up over the past few years. Large banks have found themselves fighting for market share amongst a wave of new Digital banks, which have enjoyed rapid growth as a result of successfully targeting niche customer sets.

While we saw this trend stall in 2020 due to the COVID-19 pandemic, it now looks set to ramp up again. With the whole market moving forward rapidly, we can expect to see the competition in the banking sector heat up as we head towards the rest of 2021 and into 2022.

The rise of digital first banks

There was a time when the only option for banks was to deploy huge monolithic systems, in which functionally distinguishable aspects were all interwoven. However, with consumers now demanding personalisation in almost every aspect of their lives, banks are under ever-increasing pressure to modernise their systems and customise their services to suit.

Adding new systems and features via an integrated approach offers some flexibility, but under the hood, the traditional core banking infrastructure is still restrictive.

This is not the case with the challenger banks that are currently entering the scene and rapidly growing in popularity. These providers are changing the game by operating with a digital-first or digital-only strategy, utilising innovative technologies such as the cloud and intelligent business automation from the ground up.

By targeting lucrative niches and quickly rolling out products or services, these challenger banks are able to differentiate themselves from larger financial institutions, which are less able to launch new offerings overnight.

Digital banks offer what we at Persistent Systems call a hyper-personalised ‘Digital mosaic’ of options. This gives them the freedom and resources to be flexible, cherry-picking the components they need, and focus on delivering the best options for their customers.

The challenge for established banks

Monolithic systems once offered reliability, scalability, and security, but, they have since become a deterrent to digital transformation, demanding a much greater investment of both time and money to transform. While large banks have made significant progress over the last few years, some are still carrying the baggage of legacy systems ­– making it harder to launch the offerings demanded by today’s consumer.

With expensive high street locations and these out-dated processes hindering performance, traditional banks’ costs are already sky-high. This has been amplified over the last year, with sporadic yet lengthy lockdowns forcing high street branches to close for months on end.

On the other hand, the newer, digital-first banks are serving customers at around one third of the cost and have been relatively unaffected by the pandemic – as customers were already content with an entirely digital experience even before the crisis hit.

As well as the cost and effort involved with transformation, customers are increasingly expecting a personalised experience. Traditional banks have found that by storing data in multiple product-aligned core systems, it’s far more difficult to cater to the needs of individuals.

What’s more, with partnerships becoming critical to creating the products and services of the future, large institutions are once again realising the need to modernise legacy systems, as they lack the agility needed to innovate at speed and remain competitive.

Rising to the challenge with the cloud

As larger banks have come to the realisation that the sweeping approach they previously employed is no longer the way forward, an opportunity is presented to implement the modern architecture, target niches, and put pressure back on the challenger providers.

We’ve seen some traditional banks implementing next-generation products and platforms to launch smaller banking entities or spin-offs. This has enabled them to provide a more diverse menu of offerings to targeted demographics, for instance, recent graduates or the mass affluent.

The success of these spin-offs cements the fact that for banking brands to stay competitive, they need to embrace cloud as the cornerstone of their digital transformation efforts. In doing so, they can break free from the limitations of legacy technology and create the ‘digital mosaic’ architecture needed for a unique proposition, whether that’s current accounts, loans or investment portfolios.

The digital mosaic gives large banks the same flexibility to meet the specific needs of a particular customer group for a hyper-personalised approach.

For established players, this is the reason to move to the cloud.

The role of a solutions partner

While organisations can take on this transformation on their own, it’s important to forge the right partnerships if one wants to demystify the possibilities and exploit the true potential of a highly agile, flexible banking architecture which removes the dependency on complex, legacy IT infrastructures. This is where partnering with a compatible service provider for advice and to do the heavy lifting can make a real difference.

It’s not only traditional banks that can reap the rewards of partnering with an expert third party. Despite having leaner and more nimble teams, challengers are often stuck in a Catch-22 situation – they have the vision and the strategy to improve, but they can’t afford to hire huge teams or implement countless new tools and technologies.

At the same time, they also can’t afford to go slowly. Brainstorming and decision-making takes up valuable time. But this can easily be accelerated with the help of an expert team who can adopt their mindset, replicate their approach and execute it efficiently.

For all banks, a solutions partner allows you to focus on what’s really important: providing great service to your customers.

Opinion Article for Global Banking & Finance Review ( Large banks vs challenger banks ( )