Incumbent banks operating on ageing technology stacks are looking at a 30% revenue hit as new digital-first challengers enter the market, according to a report produced by Citibank.
Citi says that traditional banks need to partner with technology companies to develop their own digital-first 'Bank X' challenger brands to see off the threat from nimbler new entrants.
The blue chip bank says that while incumbents diverted technology spend to meet regulatory and compliance challenges, they were blindsided by a new wave of competitors using technology and digital channels to deliver a better digital customer experience.
"Legacy banks often have data that is stuck in multiple silos supported by core banking technology that was literally built in the age of black and white television," states Citi in a state-of-the-market report
. "Manual intervention is high, which slows down operating speed, reduces flexibility, increases costs, and ultimately degrades efficiency and experience. Because a lot of digital technology isn’t part of core banking technology, challenger banks tend to be quicker at incorporating new products and processes onto their platforms and help to easily connect with third-party products — offering more choices to the end user."
The challenge for incumbent banks, the report continues, is that while digitalisation can lower costs by 30-50% - primarily through a decline in full-time employees as technology disintermediates workers - new competition and greater transparency are likely to lower revenues by 10-30%.
"We expect the digital disruption risk to start in payments and then widen to other financial products," states the report. "The tipping point for incumbent banks is if their core businesses of savings and loans are impacted."
To avert the impending extinction-level event, banks need to "re-invent themselves and re-imagine banking" by building their own digital offshoots.
"This involves legacy banks partnering with technology companies to create effective joint ventures as well as moving into more disruptive technology and business models to transform themselves into digital competitors," the report concludes. "By creating their own Bank X, we believe legacy banks can transform themselves from slow moving caterpillars to agile butterflies."
Citi is taking its own medicine, spending $8 billion on tech last year - a sum greater than that invested by VCs across the entire US financial technology startup scene during the same period - phasing out analog processes and pouring huge sums into fintech startups and digital banking initiatives.