High street banks in the United Kingdom reported significant losses. Collectively, they experienced a £3.7 billion drop in pre-tax profits last year.¹ Between 2019 and 2024, the traditional banks’ share of deposits fell from 84 percent to 80 percent with almost £100 billion in savers’ funds moving to challenger banks and alternative lenders.² This trend is not restricted to the UK alone. A recent Boston Consulting Group report found that while traditional banks dominate revenue across the world, significant value pools are emerging in focused financial models, especially payments, private credit, and wealth management.³ And around 85 percent of traditional banks’ growth has come from balance-sheet-driven net interest income. In contrast, non-interest income rose by only 1.8 percent in absolute terms, while the amount earned per asset dropped by 18 percent.

Is this the end of the road for traditional banks or is there something they can do to reverse the trend? Let’s find out.

The Shift from Branch Loyalty to Digital Preference

For decades, traditional banks enjoyed significant customer trust, and in the absence of disruptive competition, this secured their share of wallet, revenues, and profits. But the emergence of new technologies changed this status quo. Innovative new entities began building cloud-native and agile business models that offered customers a level of personalization they didn’t know was possible. It made it easier for customers to avail themselves of offerings like loans and credit with innovative models and made financial services accessible anytime, anywhere, and on any device. These fintechs, neo banks, and technology giants offered higher savings rates, seamless digital tools such as intuitive apps, integrated budgeting features, and faster service delivery.

Traditional banks with their monolithic infrastructure, legacy systems and processes, and business models suddenly faced a new challenge – customers were used to a level of personalized and seamless experiences from other services and expected the same from their financial services providers. And they were not afraid to switch loyalties to newer, more innovative fintechs and challenger banks if their needs were not met. While banks accelerated their digital transformation journeys, their legacy core banking systems are proving to be a deterrent to the kind of agility and flexibility they need for customer-centric innovation.

Why Incremental Change Won’t Save Traditional Banks

The situation is exacerbated as a result of rising operational costs, global economic volatility, and geopolitical tensions.  Traditional banks must break free of the low-growth, high-cost bind they are caught up in to compete with new-age financial service providers. This can only be achieved with a bold technology focused re-invention instead of incremental fixes. Here are some key things to focus on:

• Technology Modernization: Banks must deliver personalized, relationship-based offerings to ensure customer satisfaction and retention. And they need to come up with innovative, new business models that put the customer at the heart of the banking business, offer easier access to financial services, and ensure frictionless experience. To do this, they must be able to effectively use the reams of customer data lying within their systems as it holds the key to understanding customer behavior, patterns, and needs. Intelligent data-driven insights must then be used to shape strategies and models.
  The problem is that most of this data is locked away within departmental silos and product-centric legacy systems lack the agility to unify disparate data for comprehensive analysis. Neither can legacy systems be scaled up to devise and implement innovative business strategies. Banks need robust solutions that can help them roll out data-backed, customer-centric offerings.

  Fortunately, they can just choose to work with an experienced and specialized partner to deploy a middleware platform instead of completely overhauling their legacy cores, which can be expensive and risky. A cloud-native and micro-services-based platform can be deployed over their legacy cores to separate the system of records from the system of engagement, enabling banks to focus on owning the customer experience.

• Leverage Artificial Intelligence (AI): This is the age of AI and banks must tap into this transformative technology to regain lost competitive ground. AI’s power lies in its ability to analyze huge volumes of data. As banks ramp up their personalization efforts, they can leverage predictive analytics for better decision-making and personalized product recommendations. Advanced, autonomous models like agentic AI can usher in a new era of customer service with instant, insightful, proactive, and round-the-clock support and advisory services. And organizations can deploy intelligent automation to streamline repetitive processes and reduce manual errors.

• Collaboration and Partnerships: Banks are now operating in a highly disruptive technology landscape, and it may not be possible for them to fully leverage all these fully. They may lack the skilled manpower required to deploy these technologies, or they may lack the scalable, agile architecture to innovate with them. Instead, they must consider mutually beneficial partnerships with fintechs and other such partners who have technical prowess but lack the reach and trust that traditional organizations still enjoy.

• Cultural Transformation: The traditional bank has operated much the same way for several decades and now finds itself amid tremendous disruption. While they transform digitally to stay ahead of competition, they must remember that technology is only as good as the people using it. It is crucial for them to focus on cultural change as well. Reskilling and upskilling programs, hiring the right skillsets, and on-going training on agile processes and new systems will help ensure that their workforce is aligned with ongoing technological transformation.

The data from across the world shows two undeniable facts.  First, customers are favoring nimble, digital alternatives over legacy institutions that lag in responsiveness and reward. And second, organizations that continue to stick to outdated product-centric strategies will fail to thrive or even survive in the years to come.  Banks must not only fast-track their digital transformation efforts, but they must also make the right investments that will enable them to prioritize customer-centric innovation.