Digital vs Conventional Banks and The Future of the Competition within the Financial Services Industry

Saurabh Goel

05/05/2025

With the rapid dynamic pace of financial services, digital banks have emerged to be powerful contenders to the erstwhile dominance of conventional banking organizations. As a finance professional experiencing this revolution, I feel the dynamic change is not only interesting but could very well turn out to be paradigm-shifting for the entire financial ecosystem. This article examines the meteoric rise of digital banks, their evaluation of upending conventional banking paradigms, and whether we are witnessing the sunset of conventional banking or merely an imposed evolution.

The Digital Banking Revolution

The banking sector has historically been resistant to fundamental change, operating on models that were quite stable over decades, if not centuries. But technological innovation, changing consumer attitudes, and the regulations imposed since the 2008 financial crisis created the perfect ecosystem for disruption.[1] Digital banks—neobanks or challenger banks—moved quickly to take advantage.

These fintech companies do not have physical branch infrastructures, and they offer bank services exclusively over digital channels. Their value proposition is robust: lower fees (or no fees), improved interest rates, friendly interfaces, instant account-opening procedures, and innovative features that traditional banks have not yet implemented. With no physical infrastructure, there are much lower costs of operation, and these incumbents can share savings with the consumers directly without eroding profitable margins.[2]

Their growth statistics are amazing. Globally, digital banks have onboarded hundreds of millions of customers in the space of a few years. Companies like Revolut[3], N26[4], Chime, Nubank, and Monzo[5] have reached valuations that rival or exceed those of traditional banking institutions that have centuries of history. Nubank, for instance, was the most valuable financial institution in Latin America less than a decade after its founding, a trajectory of growth that would have been unimaginable in previous decades of banking.[6]

The Competitive Advantage of Digital Banks

Digital banks' success is not the result of either novelty or technology superiority. Their greatest strength is that they are customer-centric, free from the constraints of legacy infrastructure and traditional thinking.[7] Several reasons have lent them their competitive advantage:

Technology-First Architecture

Digital banks, unlike conventional banks that had to append digital capabilities on legacy infrastructure, built their architecture anew with modern-day technology stacks. This "digital native" architecture enables quicker innovation cycles, more refined third-party service integration, and responsiveness to fresh market situations. Cloud computing, API development, and microservices architecture enable the deployment of new features in weeks or days compared to months or years for traditional banking innovation cycles.[8]

Data-Driven Decision Making

E-Banking is the master of leveraging customer information to personalize services and operational efficiency. Their sites build rich behavioural data that informs product development, risk management, and marketing campaigns. Machine algorithms continually refine the processes, developing progressively more sophisticated predictive models for customer needs and wants. This is in stark contrast to 'traditional' banks, where data gets siloed by function and legacy systems.[9]

Less Regulatory Burden Most of the digital banks began with streamlined regulatory frameworks or by partnerships with licensed institutions. While regulatory scrutiny has tightened with the growth of these institutions, they still have more efficient compliance procedures than traditional full-service legacy banks. This regulatory arbitrage has allowed for faster market entry and more responsive business models, though this advantage is gradually disappearing as regulators play catch-up.[10]

Customer Experience Obsession Above all, digital banks revolutionized banking in the eyes of customers, not institutions. Their user interfaces eliminate bank jargon, simplify complex processes, and provide unmatched transparency. Features like real-time alerts for transactions, spending classification, and budgeting capabilities have transformed banking from a utility to a handy money management tool. The psychological shift from banking as an obligation to banking as an empowerment tool is a wholesale change in the behaviour of customers with financial services.[11]

Traditional Banks: Adapting or Dying?

The story that traditional banks are dying out makes for good headlines but needs careful examination. These banks have strong strengths that still offer competitive strength:

Trust and Established Relationships

Despite technological innovation, banking is fundamentally about trust. Traditional banks have decades or centuries of brand name and proven customer relationships. The perceived solidity of these banks—particularly following government interventions during financial crises—still provides reassurance to cautious customers, especially for significant financial decisions like mortgages or business loans.

Regulatory Expertise

It requires competent compliance infrastructure and institutional expertise to navigate complex financial regulations. Conventional banks have developed these over the course of centuries, creating a huge entry barrier against new entrants. As digital banks grow and are held more accountable by the regulators, this advantage becomes much stronger.[12]

Balance Sheet Strength

Traditional banks have substantial capital buffers and multi-product revenue streams in retail, commercial, and investment banking. The depth of finance allows them to weather storms and provide lending capacity that most digital disruptors can't match. Their ability to lend large amounts of credit is a classic banking activity digital banks can only partially replicate.

Physical Presence

While digital channels dominate routine transactions, high-value financial guidance and relationship-based services still value the immediacy of human interaction. Branch networks, though more optimized, provide legacy banks customer touchpoints not possible for digital pure-plays. Such physical presence serves both practical and psychological purposes in customer relationship maintenance.

The Transformation Imperative

Far from extinction, ancient banks are also experiencing forced transformation. The intensity of competition induced by digital contenders has speeded up transformation drives that would perhaps have evolved slower otherwise. That transformation manifests itself in several guises:

Digital Transformation

Most major banking institutions have invested billions in amplifying tech infrastructure, building competitive mobile apps, and streamlining digital processes. These investments are to narrow the experience gap with digital disruptors while maintaining the advantages of scope and scale. JPMorgan Chase, for example, devotes more than $12 billion a year to technology—money most digital banks can't match.[13]

Organizational Restructuring

Historical banks are getting increasingly agile, flattening their organizations, and constructing innovation labs in a bid to inject entrepreneurial zeal into their firms. Such organizational and cultural realignments help counteract institutional complacency and accelerate decision-making. Goldman Sachs' construction of Marcus is an example of a heritage institution creating a digital-first product inside its heritage framework.[14]

Strategic Partnerships and Acquisitions

Many vintage banks have turned to fintech partners or outright acquisition in a bid to acquire technology capacity and human resource very rapidly. The "if you can't beat them, join them" play allows the traditional players to leverage new solutions without reinventing them internally. Santander's venture capital wagers[15] and BBVA's buying strategy[16] are most accurately described this way.

Conventional banks have countered electronic competition by doubling down on those areas of competitive advantage—complex lending, wealth management, and institutional businesses. By concentrating resources on high-margin activities rather than directly challenging commoditized consumer banking, the institutions hope to maintain profitability while conceding ground in less profitable niches.

The Hybrid Future of Banking

The digital-vs-traditional dichotomy no longer applies as strongly as the nature of financial services keeps changing. The future will be most likely one of hybrid business models that draw on the technology speed of digital disruptors with the financial strength and regulatory expertise of incumbent institutions. Several trends support this coming together:

Regulatory Harmonization

As digital banks become more systemic in nature, they are exposed to increasing regulatory pressures in the same manner as conventional institutions. While at the same time, regulatory environments evolve to embrace new business models without undermining financial stability. This regulatory convergence introduces more balanced competitive conditions.

Ecosystem Integration

Banking increasingly is becoming embedded within broader digital contexts rather than as separate propositions. Both traditional and digital banks are positioning themselves as platforms bridging financial services and non-financial services together. This platform model dissolves the boundaries between different types of providers.[17]

Specialized Excellence

The best institutions—regardless of their background—are creating specialized capabilities rather than attempting to excel at all services. This emphasis creates room for cooperation among different types of financial providers, with customers assembling tailored financial solutions from multiple sources.

Customer Segment Divergence

Different customer segments correspond to various attitudes toward digital vs. physical banking experience. Technically inclined, young consumers may want only digital ones, while others need the protection of institutional presence. Such variety provides a ground for coexistence of several business models on a sustainable basis.[18]

Problems and Threats in the New World

The change in banking is of essential significance for financial stability, consumer protection, and financial inclusion. Some problems call for special attention:

Cybersecurity and Operational Resilience

As banking becomes increasingly digital, the cyber-attack surface expands with it. Both traditional and virtual banks face sophisticated threats from state sponsors, organized crime syndicates, and opportunistic attackers. The centralization of financial data and payment power in digital platforms provides potential single points of failure that would have systemic implications.[19]

Data Privacy and Ethical AI

The extensive deployment of customer information for personalization and risk management raises difficult privacy, consent, and bias concerns. Financial institutions must address these challenges without betraying customer trust or regulatory expectations. The possibility of discriminatory decision-making by AI-based decision systems calls for special attention.[20]

Financial Inclusion

Although online banking has provided new access to financial services for those previously denied them, the gaps remain very large. Purely digital business models can keep out those without technological access or literacy, essentially creating new forms of financial exclusion. Balancing innovation with accessible access is still the central challenge.[21]

Business Model Sustainability

The majority of digital banks have been growth-driven at the expense of profitability, employing venture capital investment to cross-subsidize customer acquisition. As interest rates rise and investment conditions become tighter, such institutions face mounting pressure to deliver sustainable economics. The scalability of freemium banking models has yet to be tested.

Strategic Implications for Financial Sector Stakeholders

The banking revolution poses strategic imperatives for stakeholders in the financial sector:

For Traditional Banks

The digital upstarts' existential test calls for aggressive action, not gradual evolution. Established institutions must leverage their strengths—customer trust, regulatory acumen, and balance sheet size—while transforming digital capabilities and organizational flexibility. The window of opportunity is narrowing as digital substitutes gain widespread acceptance.

For Digital Banks

The initial strengths of digital challengers—technological flexibility, cost structure, and reduced regulatory costs—gradually deteriorate as they mature and become more subject to close examination. Such institutions must create sustainable economics beyond the infancy phase and build institutional capabilities to address more complex regulatory regimes. Differentiation above user experience is increasingly important as digital features get commoditized.[22]

For Regulators

Diversification of banking providers presents difficulties for regulatory systems founded on conventional institutional models. Regulators must balance innovation and competition against consumer protection and systemic stability. Activity-based rather than entity-based regulation may provide more consistent supervision of different types of providers.

For Consumers

The development of several financial service alternatives presents the consumer with opportunities as well as challenges. Increased choice and improved experience come at the cost of having to compare providers on several fronts—convenience as much as security, privacy controls, and capital stability. In this splintered market, financial literacy gains prominence.

Conclusion: Evolution Rather Than Extinction

The overnight invasion of digital banks is not the end of traditional banking but its imminent metamorphosis. Banks that will prosper in the next few decades are the ones which blend the strength of both factions—the digital disruptors' technology-smartness and usability, as well as traditional institutions' solidity, regulatory sophistication, and financial stability.

The question is not whether change will outlast traditional banks but which traditional banks will succeed by changing. The banks that change, invest in technology smartly, and redefine their value propositions for the digital age will continue to be at the heart of the financial system. The ones that fail to change or do so half-heartedly are in actual danger of becoming extinct.

Similarly, online banks must get over their initial disruption positioning to build sustainable business models and buffers of institutionality. The advantage of being a disruptor diminishes as these institutions become institutionalized actors in the financial ecosystem, subject to the same underlying economics and regulation as their incumbent peers.

To businesses and consumers, the competitive pressure offers genuine benefits—lower cost, better service, greater convenience, and better targeted financial services. The digital bank's creative destruction has shaken up an industry that had grown too complacent, driving the innovations that the financial system badly needed.

The future of banking will not be digitally pure or traditionally physical but instead a spectrum of hybrid models serving different customer needs and desires. Under this new world, distinctions between "traditional" and "digital" banks will become progressively unimportant, making way for greater distinctions in customer value, niche specialization, and reputation. Those organizations that recognize and act on this reality—regardless of their origin—will define the next generation of financial services.

Sources

1.     Ross, S. (2015) What are the major laws and acts regulating financial institutions created in response to the 2008 financial crisis? Available at: https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-financial-institutions-were-created-response-2008-financial.asp

2.     Franzen, F., D'Agnoluzzo, V. and Sebastião, B. (2020) Digital Attacker Banks’ Time Has Come. Bain & Company. Available at: https://www.bain.com/insights/digital-attacker-banks-time-has-come/

3.     Mazza, R. (2025) Revolut’s value boosted. Fintech Weekly, 31 March. Available at: https://www.fintechweekly.com/magazine/articles/revolut-value-boosted

4.     Mohan, R. (2024) Nubank 2024: Soaring Valuation, Customer Growth, and Super App Aspirations. C-Innovation. Available at: https://www.c-innovation.eu/post/nubank-2024-soaring-valuation-customer-growth-and-super-app-aspirations

5.     Matsuda, T. (2024) Monzo ups valuation to $5.9bn in employee share sale ahead of EU expansion. Sifted, 11 October. Available at: https://sifted.eu/articles/monzo-valuation-employee-share-sale 

6.     Monteiro, T. (2021) Nubank becomes Latin America’s biggest bank. Global Finance Magazine, 6 December. Available at: https://gfmag.com/features/nubank-becomes-latin-americas-biggest-bank/

7.     Stripe (2024) Neobanks 101: What they are, how they work, and whom they are for. Available at: https://stripe.com/gb/resources/more/neobanks-101-what-they-are-how-they-work-and-whom-they-are-for

8.     Allocca, S. (2022) Why JPMorgan is spending $12 billion on tech. InvestmentNews, 21 January. Available at: https://www.investmentnews.com/fintech/why-jpmorgan-is-spending-12-billion-on-tech/216160

9.     EBSCO (2025) Goldman Sachs. EBSCO Research Starters: Business and Management. Available at: https://www.ebsco.com/research-starters/business-and-management/goldman-sachs

10.  PYMNTS.com (2019) Santander takes big stake in UK fintech. Available at: https://www.pymnts.com/news/partnerships-acquisitions/2019/santander-takes-big-stake-in-uk-fintech/

11.  BBVA (2019) BBVA’s digital investments and acquisitions. Available at: https://www.bbva.com/en/infographics-bbva-digital-investments/

12.  EY (2024) How privacy and consent built customer trust for a financial institution. Available at: https://www.ey.com/en_gl/insights/banking-capital-markets/how-privacy-and-consent-build-customer-trust

13.  Bleach, T. (2025) How is embedded finance changing customer expectations of digital banks? The Fintech Times, 17 April. Available at: https://thefintechtimes.com/embedded-finance-changing-customer-expectations-of-digital-banks/

14.  Cloudflare (2024) Securing financial services: Digital transformation in banking. Available at: https://www.cloudflare.com/en-gb/the-net/securing-financial-services/

[1] Ross, S. (2015) What are the major laws and acts regulating financial institutions created in response to the 2008 financial crisis? Available at: https://www.investopedia.com/ask/answers/063015/what-are-major-laws-acts-regulating-financial-institutions-were-created-response-2008-financial.asp (Accessed:26 April 2025).

[2] Franzen, F., D'Agnoluzzo, V. and Sebastião, B. (2020) Digital Attacker Banks’ Time Has Come. Bain & Company. Available at: https://www.bain.com/insights/digital-attacker-banks-time-has-come/ (Accessed: 26 April 2025).

[3] Mazza, R. (2025) Revolut’s value boosted. Fintech Weekly, 31 March. Available at: https://www.fintechweekly.com/magazine/articles/revolut-value-boosted (Accessed: 26 April 2025).

[4] Mohan, R. (2024) Nubank 2024: Soaring Valuation, Customer Growth, and Super App Aspirations. C-Innovation. Available at: https://www.c-innovation.eu/post/nubank-2024-soaring-valuation-customer-growth-and-super-app-aspirations (Accessed: 28 April 2025).

[5] Matsuda, T. (2024) Monzo ups valuation to $5.9bn in employee share sale ahead of EU expansion. Sifted, 11 October. Available at: https://sifted.eu/articles/monzo-valuation-employee-share-sale (Accessed: 26 April 2025).

[6] Monteiro, T. (2021) Nubank becomes Latin America’s biggest bank. Global Finance Magazine, 6 December. Available at: https://gfmag.com/features/nubank-becomes-latin-americas-biggest-bank/ (Accessed: 26th April 2025).

[7] Franzen, F., D'Agnoluzzo, V. and Sebastião, B. (2020) Digital Attacker Banks’ Time Has Come. Bain & Company. Available at: https://www.bain.com/insights/digital-attacker-banks-time-has-come/ (Accessed: 26 April 2025).

[8] Stripe (2024) Neobanks 101: What they are, how they work, and whom they are for. Available at: https://stripe.com/gb/resources/more/neobanks-101-what-they-are-how-they-work-and-whom-they-are-for (Accessed: 27 April 2025).

[9] Stripe (2024) Neobanks 101: What they are, how they work, and whom they are for. Available at: https://stripe.com/gb/resources/more/neobanks-101-what-they-are-how-they-work-and-whom-they-are-for (Accessed: 27 April 2025).

[10] Franzen, F., D'Agnoluzzo, V. and Sebastião, B. (2020) Digital Attacker Banks’ Time Has Come. Bain & Company. Available at: https://www.bain.com/insights/digital-attacker-banks-time-has-come/ (Accessed: 26 April 2025).

[11] Stripe (2024) Neobanks 101: What they are, how they work, and whom they are for. Available at: https://stripe.com/gb/resources/more/neobanks-101-what-they-are-how-they-work-and-whom-they-are-for (Accessed: 27 April 2025).

[12] Stripe (2024) Neobanks 101: What they are, how they work, and whom they are for. Available at: https://stripe.com/gb/resources/more/neobanks-101-what-they-are-how-they-work-and-whom-they-are-for (Accessed: 27 April 2025).

[13] Allocca, S. (2022) Why JPMorgan is spending $12 billion on tech. InvestmentNews, 21 January. Available at: https://www.investmentnews.com/fintech/why-jpmorgan-is-spending-12-billion-on-tech/216160 (Accessed: 27th April 2025).

[14] EBSCO (2025) Goldman Sachs. EBSCO Research Starters: Business and Management. Available at: https://www.ebsco.com/research-starters/business-and-management/goldman-sachs (Accessed: 27th April 2025).

[15] PYMNTS.com (2019) Santander takes big stake in UK fintech. Available at: https://www.pymnts.com/news/partnerships-acquisitions/2019/santander-takes-big-stake-in-uk-fintech/ (Accessed: 28 April 2025).

[16] BBVA (2019) BBVA’s digital investments and acquisitions. Available at: https://www.bbva.com/en/infographics-bbva-digital-investments/ (Accessed: 28 April 2025).

[17] Bleach, T. (2025) How is embedded finance changing customer expectations of digital banks? The Fintech Times, 17 April. Available at: https://thefintechtimes.com/embedded-finance-changing-customer-expectations-of-digital-banks/ (Accessed: 26 April 2025).

[18] Stripe (2024) Neobanks 101: What they are, how they work, and whom they are for. Available at: https://stripe.com/gb/resources/more/neobanks-101-what-they-are-how-they-work-and-whom-they-are-for (Accessed: 27 April 2025).

[19] Cloudflare (2024) Securing financial services: Digital transformation in banking. Available at: https://www.cloudflare.com/en-gb/the-net/securing-financial-services/ (Accessed: 1 May 2025)

[20] EY (2024) How privacy and consent built customer trust for a financial institution. Available at: https://www.ey.com/en_gl/insights/banking-capital-markets/how-privacy-and-consent-build-customer-trust (Accessed: 1 May 2025).

[21] Price, D. (2024) How fintech impacts financial inclusion. University of Phoenix. Available at: https://www.phoenix.edu/articles/finance/fintech-impact-on-financial-inclusion.html (Accessed: 1 May 2025)

[22] Franzen, F., D'Agnoluzzo, V. and Sebastião, B. (2020) Digital Attacker Banks’ Time Has Come. Bain & Company. Available at: https://www.bain.com/insights/digital-attacker-banks-time-has-come/ (Accessed: 26 April 2025).