Are Banks Becoming Obsolete? A Nuanced Look at the Future of Banking and Financial Services.
Bill Gates’ prescient 1994 assertion that “Banking is necessary, but banks are not” has never felt more relevant than in today’s rapidly evolving financial landscape. While traditional banks face unprecedented disruption from digital-native neobanks, fintech innovators, and Big Tech giants, the narrative of their obsolescence is far more nuanced than headlines suggest. Our analysis reveals that banking, as a fundamental economic function, will indeed thrive; however, the institutions delivering these services are undergoing a profound metamorphosis that will determine which survive and which perish.
The evidence points to a future where the winners will be those institutions that successfully combine the trust, regulatory expertise, and balance sheet strength of traditional banks with the agility, innovation, and customer focus of digital challengers. Rather than extinction, we are witnessing the dawn of a new banking paradigm—one where the most adaptable institutions, regardless of their origins, will capture market share by delivering seamless, personalized financial experiences that integrate deeply into customers’ digital lives.
The Disruptive Forces Reshaping Banking
The Neobank Revolution: Statistics Tell the Story
The global neobanking market is experiencing explosive growth, with projections showing the market will reach USD 3,406.47 billion by 2032, exhibiting a compound annual growth rate (CAGR) of 48.9% during the forecast period from 2025 to 2032. The neobanking market worldwide is projected to grow by 13.15% (2024-2028), resulting in a market volume of US$10.44 10.44tn in 2028. These are not incremental shifts—they represent a seismic transformation of how consumers engage with financial services.
According to BCG, challenger banks were star performers posting revenue CAGR of 78% in 2021-2023 compared to a 14% average for global fintech. More tellingly, in 2023, a number of leading neobanks (Revolut and Starling) demonstrated record profitability, and several players reported full-year profits for the first time (Monzo and bunq). The narrative has shifted from growth at any cost to sustainable profitability—a maturation that signals the neobank sector’s transition from experimental disruption to legitimate competition.
The geographic distribution of this growth reveals critical insights. Europe currently dominates the neobanking market, accounting for a 31.5% share in 2024, driven by a strong fintech ecosystem, supportive regulations, and high consumer adoption of digital banking services. Meanwhile, markets with a significant underbanked population offer attractive growth prospects. Nubank is a good example of a neobank that benefited from a narrow geographic focus, operating only in Brazil for its first six years, where they have now gathered more than 95 million clients (making up 55% of the adult population).
Big Tech’s Strategic Financial Services Ambitions
The entry of technology giants into financial services represents perhaps the most existential threat to traditional banking. BigTech companies – including Apple, Google, Meta, Microsoft, Samsung, Tencent, Alibaba – have turned their attention to reshaping the financial sector. From branching into the payments industry to offering embedded financial services within their product ecosystems, their growing influence has caused a significant disruption in the payments and traditional banking industry.
Apple’s financial services strategy exemplifies this trend. Apple Pay Later, Apple’s interest-free loans, which max out at $1,000, are self-financed through a new entity called Apple Financial LLC. The company has also launched Apple Savings, a high-yield, no-fee account through Goldman Sachs, which by August had reached more than $10 billion in deposits, according to Apple. These aren’t peripheral experiments—they represent deliberate ecosystem plays designed to deepen customer loyalty while capturing financial services revenue.
Amazon’s approach reveals a different but equally concerning strategy for traditional banks. Amazon’s playbook seems to aim at building a closed-loop system and cutting out another middleman. There’s massive cost savings from not having to pay interchange on a purchase — there’s immediate savings on the back of that, but second, it starts to deepen into the relationship with the customer. The retail giant’s expansion includes Amazon Pay, Amazon Cash, Amazon Credit Cards, short-term Amazon Lending initiatives, and Amazon Pay Later, demonstrating Amazon’s multifaceted approach to integrating financial products into its platform.
The Embedded Finance Revolution
Perhaps the most insidious threat to traditional banking comes from embedded finance—the seamless integration of financial services into non-financial platforms. Global brands from Mercedes and Amazon to IKEA and Walmart are cutting out the traditional financial middleman and plugging in software from tech startups to offer customers everything from banking and credit to insurance. This trend enables Amazon to let customers “buy now, pay later” when they check out, and Mercedes drivers can get their cars to pay for their fuel.
BaaS is already helping banks reduce customer acquisition costs from $100-$200 to just $5-35, but the real disruption lies in who controls the customer relationship. The risk for traditional lenders is that they will get pushed further away from the front end of the finance chain. And that means they’ll be further away from the mountains of data others are hoovering up about the preferences and behaviours of their customers.
Traditional Banks’ Response: The Digital Transformation Imperative
Investment in Digital Innovation
Traditional banks are not passively accepting disruption. According to a recent survey of U.S. bank executives regarding their IT spending plans for 2024, over 80% of banks intend to increase their investments by 10% or more. A significant proportion of U.S. banks, nearly 20%, are even more ambitious in their plans, intending to raise IT spending by 20-49% in 2024. Notably, not a single U.S. bank plans to reduce IT spending in 2024.
The priorities reveal banks’ recognition of the competitive threat. More than 40% of executives rank digital transformation as their No. 1 focus, reflecting the industry’s recognition of its importance and relevance. Meanwhile, cybersecurity has taken center stage for almost 30% of U.S. banks, reflecting their heightened apprehensions about potential cyber breaches.
75% of banks and credit unions have initiated a digital transformation initiative, and an additional 15% intend to formulate a strategy for digital transformation. The scale of investment is staggering: Global spending on services and technologies allowing digital transformation can be estimated at $2.3 trillion.
Strategic Partnerships and Ecosystem Plays
Rather than compete directly with every fintech innovation, many traditional banks are pursuing strategic partnerships. Sensing the threat from tech giants, Wall Street banks face the dilemma of beating them or joining them. Examples include Citigroup teaming up with Google on bank accounts, and Goldman Sachs providing credit cards for Apple.
However, these partnerships come with risks. The risk for banks rushing into partnerships is that tech companies will own the customer relationship and branding in these deals, keeping the most lucrative parts of that relationship. At stake for the North American financial industry is up to 40 percent of the $1.35 trillion in revenues that could migrate to tech companies like Amazon or be lost to price competition, according to McKinsey.
The Regulatory Moat: Where Traditional Banks Maintain Advantage
Compliance Complexity as Competitive Advantage
While regulatory compliance is often viewed as a burden, it has become an unexpected moat protecting traditional banks. Neobanks face increasingly complex AML compliance requirements, often without traditional banks’ legacy infrastructure or staff depth. Developing and implementing a strong AML compliance program can be expensive, necessitating considerable expenditure on sophisticated technology, skilled staff, and continuous training. Being startups or relatively new companies, many Neobanks have restricted resources compared to established traditional banks.
The regulatory challenges facing neobanks are substantial. Neobanks have a global presence with customers from different countries and regions, making it challenging to comply with anti-money laundering (AML) regulations. AML rules can vary significantly in different countries, making it difficult for Neobanks to adhere to multiple and sometimes contradictory regulations.
A growing number of neobanks operate across two or more regions, making compliance a multi-layered challenge. Regulations often differ not just in detail but in enforcement style and documentation requirements. For example, reporting expectations under the EU AML Directive differ substantially from those in the U.S. Bank Secrecy Act.
The Licensing and Infrastructure Reality
Despite their growth, most neobanks still depend on traditional banking infrastructure. Neobanks are categorized as financial institutions instead of banks, so they don’t follow the same regulations as traditional banks. For example, neobanks don’t need a bank license under federal or state regulations. However, to ensure the Federal Deposit Insurance Corporation (FDIC) insures deposits, it usually partners with a regulated financial institution.
The non-bank fintech collaborating with the banks segment owns the largest market share and is anticipated to grow significantly during the forecast period. Collaborating with banks allows neo-banks to diversify their product offerings. This symbiotic relationship suggests that rather than replacement, we’re seeing evolution and specialization within the financial services ecosystem.
The Customer Experience Revolution
Where Neobanks Excel
The customer experience advantages of neobanks are undeniable. By offering online services, neobanks can cut operating costs associated with leasing physical spaces, hiring branch employees, and dealing in physical money. This allows them to charge lower fees and offer higher interest rates than traditional banks. Account opening can be easier and quicker, as some neobanks don’t check banking histories.
Customer experiences are improving across the board, and banks now have to compete with the customers’ last best digital experience – whether that experience was with a financial product or not. The bar has been raised not just by other banks, but by every digital interaction customers have—from ordering rideshares to purchasing products online.
The Personalization Arms Race
2025 will see AI ‘chatbots’ transform into fully-fledged digital financial assistants, combining their conversational abilities with sophisticated financial analysis and proactive guidance. The upcoming generation of AI banking assistants will provide personalised financial guidance: AI will spot patterns in spending and banking habits, and give timely recommendations.
GenAI is set to play an even more prominent role in the future of financial services, and 2024 will likely see accelerated innovation and integration of the technology. The emergence of so-called ‘predictive credit cards’ will use AI to anticipate consumer spending needs based on criteria such as past behaviour.
Challenges Facing the Disruptors
The Path to Profitability
Despite impressive growth metrics, profitability remains elusive for many neobanks. According to BCG, only 23 out of 453 global digital challenger banks in 2023 were operationally profitable. The challenging backdrop has prompted neobanks to shift from ‘growth at all costs’ to profitable growth and sustainable operations.
Security and Trust Concerns
Beyond fines, data breaches and attacks can significantly damage consumer confidence in non-traditional banks. Privacy and data protection concerns can also stop consumers from switching to neo-banks. The challenge is acute because neobanks must navigate complex financial regulations to ensure their operations are legally sound. Security concerns also loom large, with cyber threats targeting digital banking platforms escalating.
Scale and Resource Limitations
Scalability poses another challenge as neobanks strive to expand their market reach while maintaining personalised services. Building consumer trust and loyalty in a crowded market saturated with mobile payment options and investment apps is a constant uphill battle.
The Future Banking Landscape: Coexistence, Not Replacement
The Hybrid Model Emerges
The future of banking is not a zero-sum game between traditional banks and digital challengers. Instead, we’re witnessing the emergence of hybrid models that combine the strengths of both approaches. Neo-banks indeed excel in offering innovative, customer-centric services with lower fees and solid user experiences, but their reliance on traditional banks for liquidity management and regulatory compliance (e.g., FDIC insurance) highlights the complementary nature of these partnerships.
Traditional banks are responding by launching their own digital initiatives. J.P. Morgan unveiled YouInvest, its answer to free-trading app Robinhood. Citigroup and others have released digital-only banking apps, and Bank of America is planning to unveil a financial coach called Life Plan.
The Role of Regulation in Shaping Competition
U.S. tech companies would be put off by becoming banks themselves due to the accompanying regulatory restraints. This regulatory complexity creates natural boundaries for Big Tech expansion into core banking services. The return on capital for a tech company is much greater than that of a lender, suggesting that tech giants may prefer to partner with banks rather than replace them entirely.
Specialization and Market Segmentation
Banks should explore new offerings tailored to specific customer segments, such as those interested in wealth management, sustainability, or a regional focus — areas that typically require extensive resources and expertise, which neo-banks might not have. This specialization strategy allows traditional banks to leverage their deep expertise and regulatory relationships while neobanks focus on mass-market digital services.
Strategic Implications for Financial Services Leaders
The Innovation Imperative
Banks now have to compete with the customers’ last best digital experience, whether that experience was with a financial product or not. Better customer experience often means more personalisation, and with increased consumer awareness of the capabilities of AI, customers will be demanding more personalisation as well as closer affinity to their daily lifestyles.
The message is clear: incremental improvements to existing systems will not suffice. Banks must fundamentally reimagine their value proposition and delivery mechanisms to remain relevant in an ecosystem where customers expect seamless, intelligent, and personalized financial services integrated into their daily lives.
The Data Advantage
Financial services companies and banks also want to join the Big Tech consumer data ecosystem to understand their customers better and offer more personalized products. To do so, they need access to data from other sources, such as partnering with third-party fintechs to tap into embedded finance.
The future belongs to institutions that can most effectively harness customer data to deliver predictive, personalized financial services. This requires not just technological capability but also the trust and regulatory framework to use that data responsibly.
Partnership Strategy
Traditional banks are acknowledging that in this era of blurring boundaries between industries, everyone is a competitor. The most successful institutions will be those that can navigate this complex, competitive landscape through strategic partnerships while maintaining control over core customer relationships.
Looking Forward: The Banking Ecosystem of 2030
Scenario 1: The Platform Economy
In this scenario, a few dominant technology platforms control the customer interface, with traditional banks relegated to providing licensed infrastructure and regulatory compliance. Customer acquisition costs skyrocket for banks as they lose direct access to consumers. Winner: Big Tech. Loser: Traditional banks that fail to secure platform partnerships.
Scenario 2: The Hybrid Revolution
Traditional banks successfully transform themselves into technology-enabled financial service providers, combining their regulatory expertise with cutting-edge digital capabilities. Neobanks mature into profitable specialists serving specific market segments. Big Tech focuses on payments and embedded finance rather than full banking services. Winner: Adaptive institutions from both traditional banking and fintech. Loser: Banks that resist transformation.
Scenario 3: The Regulatory Reset
Increasing regulatory scrutiny of Big Tech’s financial services activities creates opportunities for traditional banks and neobanks operating within established frameworks. New regulations around data privacy and financial stability favor institutions with proven compliance track records. Winner: Compliant financial institutions. Loser: Tech companies with limited regulatory experience.
Evolution, Not Extinction
Bill Gates’ prediction that “banking is necessary, but banks are not” captures an essential truth: the function of banking will persist and evolve, but the institutions delivering those services must adapt or perish. Our analysis reveals that rather than obsolescence, we are witnessing the most significant transformation of financial services since the invention of modern banking.
The winners in this new landscape will be institutions—whether they originated as traditional banks, neobanks, or technology companies—that can combine three critical capabilities: deep customer understanding powered by data and AI, seamless digital experiences that integrate into customers’ daily lives, and the trust and regulatory expertise necessary to handle money safely and compliantly.
Traditional banks possess significant advantages in regulatory expertise, balance sheet strength, and customer trust. However, these advantages are rapidly eroding in the face of superior customer experiences and lower costs from digital challengers. The banks that will thrive are those that can leverage their fundamental strengths while rapidly developing digital capabilities that match or exceed those of neobanks and Big Tech.
For neobanks, the path forward requires demonstrating sustainable profitability while scaling operations and building the trust necessary for customers to entrust them with their primary banking relationships. Many will succeed in serving specific market segments or as specialized service providers within the broader financial ecosystem.
Big Tech companies will continue to expand their financial services offerings, but regulatory constraints and capital allocation preferences will likely limit their transformation into full-service banks. Instead, they will focus on high-value, low-regulation services like payments and embedded finance.
The future of banking is not a story of replacement but of renaissance—a fundamental reimagining of how financial services are conceived, delivered, and experienced. In this new world, the function of banking will be more important than ever, but only institutions that can evolve rapidly enough to meet rising customer expectations will survive to provide it.
The question for financial services leaders is not whether banks will become obsolete, but whether their institutions will be among those that successfully navigate this transformation. The time for incremental change has passed—the future belongs to those bold enough to reinvent themselves completely while never losing sight of the fundamental trust and reliability that has always been at the heart of banking.