Europe’s traditional banks investing in fintech to face neobank challenge

Europe’s traditional banks investing in fintech to face neobank challenge

Traditional European banks are increasingly pursuing digital and technological avenues to meet the competition posed by neobanks, according to the latest Economist Impact report from Temenos.

The report found that 43% of surveyed European banks are investing in fintech startups whilst 36% are building in-house greenfield digital banks or fintech holdings, with traditional institutions seeking to counter rising competition in the form of neobanks.

Monzo and Revolut are two of the biggest names that come to mind – the former has now surpassed nine million customers with over two million secured last year, whilst the latter continues to develop and enhance its offering.

In response to these challenger banks, which have come into prominence over the past decade or so, the traditional sector has been developing its own offering. 

The Economic Report uses France’s BNP Paribas’ Hello Bank! and Spain’s Banco Santander as examples, but we can also look further afield to Chase from JP Morgan in the US.

In addition, the report also noted that participating in sandboxes to collaborate with fintechs and other technology providers and initiation of Open Banking hubs have also been two routes pursued by traditional banks, at 25% each respectively.

A further 29% said that creating in-house accelerator or incubator programmes were on the corporate agenda, and another 21% stated that simply acquiring existing fintechs was not off the table.

“Fintechs and neobanks took the lead in using new technologies to provide better customer experiences,” said Jonathan Birdwell, Global Head of Policy & Insights, Economist Impact.

“European banks are now fighting back, emulating the way non-traditional players have used technology to reach consumers who had been underserved by traditional financial services, and to appeal to existing customers with support in managing their personal finances.”

Neobanks have hardly been operating without their challenges either, however. Whilst traditional banks are seeking to replicate the neobank UX, the neobanks have been facing difficulties in securing full banking licences.

Monzo was able to secure a banking licence from the UK FCA and PSR in 2017, but the licence has been eluding Revolut for some time, with its 2021 application rejected by UK authorities.

Some senior figures at high-profile banks remain sceptical of neobanks long-term success, with 21% informing Economist Impact that they expect to flourish whilst 35% believe that there will be eventual market consolidation.

Regardless, it is clear that the traditional sector recognises the competition posed, with the report’s European respondents “more likely to believe that shifting roles and fortunes of platform players, neobanks, payment providers and more will be the biggest impact on banks in their country in the next five years”.

“European banks are more likely than banks elsewhere to expect neobanks to be their company’s biggest competitors in the next five years,” the report continued.

“However, payment players and technology providers continue to be top of mind, with payments the space that banks predict new entrants will gain the most market share.”

What is clear is that with neobanks continuing to pursue full banking licences, traditional banks becoming increasingly involved in fintech and both the EU and the UK seeking to move ahead with Open Banking development, convergence between the new and old is a distinct possibility. 

“The competitive landscape is shifting. As neobanks and fintechs experience growing pains and face funding difficulties,” said Kanika Hope, Chief Strategy Officer, Temenos.

“Europe’s banks are taking advantage of the opportunities afforded by open banking by pursuing collaborations with their challengers to offer a wider range of better services to their customers. 

“They are also investing in technology, using cloud-native banking platforms and SaaS to improve the customer experience and ensure their operations are agile and secure.”