Fintech hasn’t just transformed traditional banking. It has revolutionized it. Over the last decade, the emergence of tech-first challenger banks like Revolut, Starling and Monzo has sent the traditional players scrambling to frantically update their outdated infrastructure and bring their offerings into the 21st century.

More than anything, the fintech boom has brought customer experience front and centre and in doing so, shown customers they have a choice. Incumbent banks are now dealing with a customer base who expect a certain experience and are willing to move to find it.

As we enter 2022, the penny seems to have finally dropped for traditional banking with most national and global banks now tech focused enough to justifiably consider themselves fintech businesses too. They’ve pumped time and money into overcoming the numerous legacy issues that left them lagging behind the challengers and now have the tech infrastructure to match them.

But it’s not that simple. Big banks still have baggage, vast numbers of customers and employees and legacy issues remain. Whereas the fintech challengers, even the biggest ones, are built to adapt, innovate and integrate.

Put it this way, it’s a lot harder to turn around an old sixteen wheel truck than a Tesla.

The challengers’ problem, however, is remaining relevant and stable enough to continue doing what their name implies.

Both sectors are at a crossroads. The big question is where do they go now?

Traditional banking is going to have to remember how to innovate

Frankly, it was traditional banking’s inability to innovate that left the door open for the challengers in the first place. Now, to beat - or even just join - them, they must move beyond trying to look like them and actually start to think like them.

They need to look at the successful challenger banks and match what they’re doing. If they can do this, big banks have the resources and the trusted names to make back any losses. Customers, overall, don’t tend to be too bothered about who offers them their financial services. In fact, one major problem the challenger banks face is getting customers to use their accounts as primary bank accounts. Trust issues still linger. If big name, traditional banks can offer a genuinely high level of customer experience, they will thrive.

Customers now want more than traditional banking services. It’s no longer just about accounts, cards and loans, with each bank’s offering interchangeable with the next. It’s about a positive user experience, a strong app and online product and, increasingly, an ecosystem of personalized products.

This is where fintech brands and challenger banks have the upper hand. Innovation is in their very DNA. Plus, they possess the tech structures to integrate the services of fellow fintech brands or offer out their own.

See, innovation doesn’t have to mean creating something from scratch. The beauty of what so many fintech brands have done is that their services are fully integratable. With their Banking-as-a-Service (Baas) products, they are making companies that would have previously been competitors into colleagues.

I see this every day at my company AAZZUR as we work with fintech and retail companies to embed personalized financial services into their user journeys.

A number of traditional banks are already wise to this. Lloyds are working with Thought Machine and RBS with 11:FS, improving their own offerings by integrating with some of the most innovative fintech companies around.

If more traditional banks can combine this level of collaboration and innovation, success surely beckons.

The challengers are going to have start turning a profit

For the majority of fintech brands and challenger banks, profitability has to be the next focus. Growth without profit can only take you so far. Look at Monzo. Despite being a unicorn company, it still had to run a £60 million funding round, at a 37.5% devaluation on its 2019 round, just to keep the business afloat. Living that close to the edge is not sustainable. They attract very good investors, so we know the future strategy will be monetisation and growth.

And with incumbent banks finally getting their act together and the tech giants looking at entering the fintech space, an already crowded market is about to get a lot more crowded and a lot more competitive.

How, then, will they profit and continue to challenge?

Most challenger’s first port of call is a raise in prices or the introduction of fees. This, however, can prove alienating and pick up is often low. Monzo’s first paid model was pulled after just 4 months. It recently relaunched, with only 4% users opting for paid accounts this time around. Faring only slightly better, just 14% of Revolut users pay for their accounts. People just don’t like paying for traditional banking services, it’s as simple as that.

Predictably, many companies will go down this route, but the better option, again, is focussing on BaaS. Either as a provider, offering out their own financial services to other companies or by integrating other fintech brands’ services into their own systems to improve their own offering.

Take Starling for example. Two things really separate it from Monzo and Revolut. One is that it is consistently profitable. The first of the challenger banks to become so. ​​The other is that it has the most diversified revenue stream. That’s no coincidence.  When it finally broke even in 2020, just 45% of its revenues came from card transaction fees - the main earner for challenger banks.

Starling benefits hugely from both sides of BaaS. It offers out its payment rails to companies like Raisin, SumUp and MasterCard while simultaneously partnering with other fintech companies like Wealthify and PensionBee to offer its own customers a wider range of personalized services.

Because of the ease with which most BaaS products can be integrated, its potential goes far beyond just partnering with fellow fintech companies. It gives any digital retail company the chance to offer their own customers services that were previously the domain solely of banks.

For fintechs looking to leave the life support of investment and VC funding, the BaaS route seems the way to go. Especially when some estimate embedded finance could be worth 6.3 tn€ over the next ten years.