Global Banks Face Pressing Need for Transformation Amidst Growing Competition from Fintechs

A Call to Action: Transforming the Global Banking Landscape

The landscape of global banking is undergoing a dramatic shift, with traditional institutions losing their foothold in an industry that is increasingly dominated by fintech and nonbank challengers. A recent report by the Boston Consulting Group (BCG) highlights this urgent situation, revealing that the global banking industry has grown at a compound annual growth rate (CAGR) of just 4% over the last five years. In stark contrast, fintechs, digital challenger banks, private credit funds, and other nonbank players are capturing significant market share, making it essential for traditional banks to evolve or risk being left behind.

Declining Influence of Traditional Banks

The report, titled Fit for Growth, Built for Purpose, details the shift in market dynamics where traditional banks are primarily relying on balance-sheet-driven net interest income to drive growth. Approximately 85% of their growth stems from this source, but they are struggling to generate capital-light noninterest income—the relative amount earned per asset had fallen by a staggering 18%. This is particularly concerning as customer preferences lean towards more nimble and technologically advanced financial options provided by challenger banks and fintech platforms.

In the retail banking sector, digital-first banks are beginning to match the customer bases of their traditional counterparts, ushering in a new era of competition. Additionally, the corporate and investment banking realms have not escaped this trend, as nonbank liquidity providers and private credit firms have carved out substantial revenue streams previously dominated by traditional players. The report cites the rapid growth of stablecoins and tokenized assets, which processed around $4 trillion in transaction volume in 2024, signaling a major realignment of the financial sector.

Moreover, internal challenges plague traditional banks. After substantial investments in technology, many institutions have failed to achieve the productivity gains they anticipated. Notably, in major markets such as Europe and the UK, increased tech spending has not resulted in enhanced operational efficiency. As a result, while challenger banks continue to grow and thrive, many incumbent banks find themselves operating on antiquated cost models that could be up to ten times more expensive.

Learning from the Top Players

In examining the characteristics of successful banking institutions, the report outlines three main patterns that are rewarded in the marketplace. Firstly, having a leading position in the domestic market is crucial—not merely for size, but for scale. Furthermore, a superior share of fee income is essential for long-term viability, along with exceptional overall productivity.

To keep pace, today's banking leaders are adopting four strategic approaches: 1) front-to-back digitization, 2) customer centricity, 3) focused and streamlined business models, and 4) mergers and acquisitions targeted at enhancing capabilities. Embracing these strategies requires banks to bolster their digital proficiency significantly.

As emphasized by BCG managing director Andreas Biffar, “Banks must critically evaluate their business portfolios and make strategic choices to concentrate on areas that promise the greatest return.” Simplifying product offerings and digitizing operations from end to end is viewed as a non-negotiable imperative in the current climate of rapid change.

The Transformative Power of AI

The report also notes the potential of Artificial Intelligence (AI) to serve as a game changer in the banking sector, although many banks are still navigating challenges in its effective implementation. A focused, vigorous strategy toward AI adoption is necessary, with barriers primarily stemming from scaling difficulties and a lack of holistic buy-in from both employees and customers. As advanced AI technologies such as agentic AI and machine voice technology emerge, institutions that effectively leverage these innovations could gain a significant edge over competitors. However, it is crucial to recognize that the benefits of these technologies may already be skewed in favor of nonbank entities that are currently better positioned to capitalize on their applications.

Rethinking Relationships: A New Social Contract

To ensure the banking industry's sustainability, the report suggests the necessity for banks, regulators, and policymakers to negotiate a new social contract. This would foster audacious experimentation, a seamless integration of digital assets, and increased accessibility to synthetic scale for smaller institutions. The conclusion that emerges from the findings is clear: there is no time to waste. Transformational efforts must begin now to redefine the relationship that banks hold with the society they serve, enabling them to reclaim their influence in a rapidly changing financial environment.

For a detailed exploration of these insights and strategies, download the complete report here.