Banks Bleed Revenue to Nonbank Fintechs—AI Can’t Stop It
AI is seen as the miracle cure to all ills, but it can't help banks staunch the bleeding.
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Banks are bleeding market share to a new generation of nonbanks born in the fintech revolution, to the tune of around 16% of their total global revenue for 2023 and growing.
Who are these nonbanks? The list is long, but the key players are wealth management, retail trading, private credit (BNPL), and payments. The problem for banks is that these competitors are beating banks’ low annual growth rate of 10-15% by many multiples.
This means that whatever revenue impairment these nonbanks caused last year, it will be larger next year, and banks have no chance to staunch the bleeding.
A prime example of this can be found in incumbent banks' arch-nemesis, the neobanks. These digital banks are now building sizable customer bases and capturing significant market share. With growth rates of 85-100% annually, incumbents are simply unable to evolve quickly enough to counter this growth.
Remember when bankers laughed off neobanks as inconsequential? Not anymore!
Want an example of where we are heading? Look to China where retail banking has been broadly disrupted by mobile payments and digital wallets. Retail banks have become nothing more than safe storage places for money while much of the services have migrated to superapps. Banks haven’t gone bust, but they feel the burn.
So, can AI step in and save banks? No way, no how. The sad truth is that most banks are poor users of AI, and asking them to implement AI that reverses an existing trend of revenue loss is a big ask.
Yes, AI can help banks slow the loss to some degree, but most nonbanks, and certainly neobanks, are better users of digital technology than incumbents. Whatever gains and incumbent may make with AI, you can bet their competitors will do more.
Fintech has fundamentally changed the banking market, and according to BCG, their goal should be to attain scale in their domestic market, not size.
This is a big ask for incumbents, and while most have ample capital to withstand years of revenue bleed, they’ll have to be content with watching their role in society diminish as nonbanks prosper.
Fintech certainly didn’t kill the banks, but it put them on life support.
But the biggest question: Why would any fintech want to become a bank??
👉Banks’ deep structural challenges:
🔹Financial services revenues are growing—but banks are not capturing their fair share. Significant value is migrating to a range of players, including fintechs, digital attacker banks, private credit funds, and nonbank liquidity providers (such as market makers).
🔹 What ails banks? A secular decline in fee income generation, a struggle to lift productivity and scale the business, and underutilization of balance-sheet management as a value driver are combining to challenge the industry.
🔹 There are pockets of outperformance. Despite the challenges, some banks consistently outperform their peers through execution excellence and a focus on attractive businesses.
🔹 What sets leaders apart? We observe three patterns that the market tends to reward: scale—not size—of domestic market leadership; the ability to generate a superior share of fee income; and market-leading productivity.
🔹 There are four winning stances. Today’s leaders in banking typically pursue four strategic approaches: front-to-back digitization; customer centricity; focused business models; and M&A champions.
🔹 AI, a game changer if implemented boldly with focus, may not be enough. If AI has not yet delivered for all banks, that may be due more to challenges in scaling and a lack of holistic adoption by employees and customers, than to issues with the technology.
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