By now, it’s safe to say that the banking industry is under fintech attack. Whilst there is undoubtedly room for exponential growth in the short-term, it’s important to question whether there is a long-term opportunity for fintechs to compete with the big banks.

The competition is burgeoning

Monzo, the digital challenger bank, smashed a record on Crowdcube (the online crowd-funding platform) in 2016 by raising £1m in 96 seconds, making it the fastest funding round ever. This year, they came back to raise £22m in a Series C funding round. There is growing excitement around this bank who are committed to putting customer-centricity at its core.

Monzo is a mobile app that allows users to pre-load a bank card with money that can be spent abroad at the interbank exchange rate, with no transaction or withdrawal fees. It also provides value to customers by automatically categorising expenditure and giving a real-time breakdown of spending habits, which can help the customers manage their budgets much more easily. As well as a great customer experience, fintechs like Monzo are putting customers first by showing greater transparency and removing the frictions of hidden fees involved in transferring money.

How can the big Financial Services firms respond?

The revolution in banking has caused a stir amongst executives in traditional banks. 87.1% of whom say that they currently don’t have the IT infrastructure to service a digital ecosystem in the way that they’d like to, according to the Capgemini World Retail Banking report.

The cost of the required digital transformation reaches far beyond the estimated $459bn currently being invested by financial institutions on IT capabilities. Organisations need to consider multiple factors, for example, back-end operational processes need serious improvement, in order to support a truly customer-centric organisation. Currently, it can take over 12 months to launch a new digital feature to market, due to the frictions of making any changes in such monolithic organisations.

It can take big banks years to undergo an end-to-end global digital transformation. They’re already struggling to keep up with customers’ evolving digital expectations, and customer-centric fintechs are now another huge obstacle to overcome.  So where does this lead?

Market opportunities

Until now, larger banks have been buying minority interests in fintechs in order to reap the returns of the burgeoning growth, without necessarily taking control of their operations.  Spanish Bank BBVA, for example, acquired a 30% stake in U.K-based Atom Bank in 2016.

This trend is now evolving. Almost 50 percent of financial services firms around the world plan to acquire fintech start-ups in the next three to five years. 8 out of 10 institutions foresee making strategic partnerships with other firms that are reshaping the business of money, according to a report by PwC.

BNP Paribas recently agreed to buy the French digital bank Compte-Nickel for 200 million euros ($213 million), making it the biggest fintech acquisition ever in France. This signifies a shift in the banking industry. The penny has dropped. Traditional banks know they must address these digital challengers in some capacity, by joining forces in order to remain competitive in the market.

The horizon

However, Lloyds Banking Group celebrated its 250th anniversary last year. Institutions of this size and capital endowment have the ability to acquire or attempt to copy the features of growing fintechs. Their challenge lies in navigating the successful back-end process improvement required to support these digital transformations.

As the finX sector reaches maturity, we explore an interesting intersection of banking and technology. It’s important to understand that while many fintechs are revolutionising the industry by putting the customer first, we probably won’t see an end to the domination of the market by traditional banks for some time.

There are probably two viable options for traditional banks in the market going forward. 1) Acquisition of fintechs 2) greater collaboration and partnership with challenger competitors, as they source the best position in the market to mutually cohabitate.

As the saying goes, if you can’t beat them, join them.