I had the pleasure of participating in the 'Analyst All Stars' session at FinovateEurope this week in London, where I had the opportunity to share my seven-minute vision for "how banks can succeed in the brave new world of super-apps, marketplaces, ecosystems and platforms."

Since seven minutes wasn't long enough to cover everything, I decided to take a little more time this month to elaborate on my assessment of the present situation in banking.

Banking had a difficult 2023, and 2024 isn't off to a better start.

The year 2023 was terrible for the banking sector. FinovateEurope 2023 really took place a few days following the failure of Silicon Valley Bank, and at the time, we had no idea that it would be the first of many bank failures to come, including the spectacular failure of Credit Suisse and Signature Bank.

The Financial Times reports that 2023 was one of the worst years for layoffs since the financial crisis, with banks cutting more than 60,000 jobs. However, 2024 is off to a similar start with TSB, Virgin Money, and Lloyds Bank among the various institutions that have already announced branch closures and employee layoffs.

In addition to coping with more frequent and strict regulatory requirements, banks face a wide range of problems, including growing competition from neobanks, fintechs, and Big Tech, as well as revolutionary technological advances in cloud computing, open banking, and artificial intelligence. Being a banker is not easy these days.

Neobanks don't pose a risk until they do.

The future of neobanks has received a lot of negative press, but it's easy to forget that many of them are still in their early adolescent years and that a small number have already reached adulthood.

Neobanks originated in Europe; the UK and Germany saw the emergence of Atom Bank, Monzo, N26, Revolut, and Starling Bank among other early participants. Compared to the global average of 56%, 72% of the European neobanks monitored by Omdia's Neobank Activity Tracker are start-ups.

In Europe, the number of incumbents who have successfully developed neobanks is quite small. Chase UK is an exception, since much of their efforts have been directed at strengthening their current brand's online presence in reaction to the danger.

Neobanks are, after all, always a customer's second bank, correct?

Not precisely.

According to a recent announcement, Monzo has grown to 9 million customers by 2024. In addition to becoming profitable last year, this places the neobank as the seventh-largest bank in the United Kingdom.

In fewer than four years, Monzo's customer base has more than doubled. Monzo's 2023 annual report shows that its revenue increased by 2.3 times, card spend increased by 38%, and deposits increased by 34% (to £6 billion). These figures suggest that more and more people are turning to Monzo as their primary bank.

Just have a peek at its constantly growing range of products. Monzo's toolkit now includes business accounts, investments, credit cards, and savings. Furthermore, Monzo is not alone. Other neobanks include Nubank, bunq, and Starling Bank, all of which offer banking services that rival those of any established bank. With over 90 million customers, Nubank is actually headed toward becoming the largest financial services provider in Latin America.

Debt from legacy technologies is incumbents' worst enemy.

Even while established banks wish to go to the cloud, they are still largely dependent on their on-premises infrastructure and on-premises applications due to a mix of technological debt and regulatory constraints (in some locations).
 

More than 64% of banks' global technology budgets, according to Omdia's Retail Banking Survey, are devoted to sustaining their current legacy technology, with only 36% going toward expanding or modernizing it. According to the same survey, "customer management" is the top business priority for banks, with 45% of respondents citing it as such.

Many of these current banking systems, especially those on the back end, rely heavily on antiquated technology. Because of this, it is difficult to swiftly replace this technology, therefore migrations must be done gradually.In order to improve user experience and offer the perception of real-time changes, several incumbent banks have opted to modernize their front-end infrastructure first, as this is more doable, even though it isn't any faster on the back end.

Banks do, however, want to make investments in core banking infrastructure; according to 38% of respondents, "creating a consolidated customer view" is the primary driver behind their decision to modernize their core banking system.
 

Open banking is becoming more and more popular among European banks.

Open banking has been at the forefront of a larger movement toward customer-facing interfaces that are open and partnerships-based digital ecosystem cooperation, which has resulted in a change in value chains and business models. 68% of European retail banks want to use open APIs to enhance their own offerings, which is significantly higher than the global average of 48%, according to Omdia's Retail Banking Survey.

There are several methods to adopt open banking. The three primary models are shown in the picture above. But I want to concentrate mostly on the idea of the "marketplace."

With the marketplace method, customers can assess several customized products from suppliers in the financial services sector simultaneously without having to manually enter details each time by using the data platform as a comparison tool. A bank can offer a platform for integrating both its own and outside companies' products. Some institutions, including DBS Bank in Singapore, have already done this with some degree of success.

The market method has the potential to be quite effective, in my opinion. It offers consumers a tailored and curated selection of financial services, helping banks stay relevant.

Open banking could be the driving force behind "super-apps'" popularity in Europe.

Super-apps have failed in Europe for a number of reasons, including their restriction of choice. Open banking-enabled markets, on the other hand, give customers convenience and some choice.

An excellent illustration of this is the Starling Marketplace, in which Starling Bank has pre-selected and screened a number of third-party providers, such as Direct Line, Habito, and Wealthify, and then connects and streamlines the onboarding process through the Starling Bank app using open banking technologies.

The fact that banks are all regulated organizations that are still (mostly) trusted with handling money gives them an edge.

I believe that banks should concentrate on their core competencies, which include savings, mortgages, and deposits, and collaborate with other companies to give customers additional options while preserving their relationship.

In my opinion, open banking will enable super-apps in Europe to create a marketplace of choice, but banks will still have a big part to play.