Banking incumbents which are slow to upgrade their infrastructure could take a 30 per cent hit in revenue, as challengers gobble up more of the market for innovative digital banking services, according to Citibank.

A new report from the US-based bank has demonstrated a growing need for established banking players to develop their own standalone digital-first brands in order to fend off the growing number of FinTech challengers, such as Monzo, Starling and Revolut.

It said that 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”.

The report said digitalisation could bring down costs by 30-50 per cent, as robotic processes and technology such as artificial intelligence take on more menial tasks from employees. However, rising competition from digital challengers could knock revenues at traditional banks by 10-30 per cent.

Citi stated that partnerships with technology companies could be one route for incumbents to quickly advance their own FinTech solutions, such as the reported move from RBS to work with digital challenger Starling in developing its own standalone digital banking platform Bo.

The report also cautioned against incumbents continuing to plough resources into compliance and RegTech solutions as part of an ongoing response to the tide of regulation following the financial crisis. Instead, they should be focussing efforts on building customer-facing digital solutions to meet rising demand for app-based and mobile banking options.

“These challenger banks were designed around the digital revolution and were able to leverage data insights via agile technology stacks,” the report read. “With these insights, they offered a customer personalisation in their financial services and a fully digital banking experience.”

It said that the need for manual intervention attached to core banking technology slows down operating speeds, reduces flexibility, drives up cost and degrades efficiency and experience.

Ronit Ghose, global head of bank research at Citibank, said: “Creating an ‘incumbent challenger’ sounds like an oxymoron, but as legacy banks recognise the threat that new entrants into banking are posing to revenue and customers, they need to reinvent themselves and reimagine banking.

“By creating their own Bank X, we believe legacy banks can transform themselves from slow moving caterpillars to agile butterflies.”

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