Traditional banks are losing control over industry growth and at risk of being sidelined by rising fintech and non-bank challengers.
Over the last five years, the global banking sector has expanded at a compound annual growth rate of 4%. However, fintechs, digital attacker banks, private credit funds and non-bank market makers are gaining the most territory from traditional banks, according to a recent Boston Consulting Group report.
About 85% of traditional banks' growth has come from balance-sheet-driven net interest income. However, they have trouble producing capital-light non-interest income, although it increased by 1.8% in absolute terms, the amount created per asset fell by 18%, the report added.
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Eroding Dominance Of Traditional Banks
Challenger banks and fintech platforms are gaining ground in retail banking in terms of investor trust and client share, and digital-first banks currently have customer bases comparable to that of traditional banks in some markets.
Private credit funds and non-bank liquidity providers are taking a sizable portion of the revenue streams that traditional banks have controlled. Meanwhile, given that stablecoins processed almost $4 trillion in transaction volume in 2024, the explosive growth of stablecoins and tokenised assets suggests that a more extensive reconfiguration of the financial sector is imminent.
Banks also face internal pressures. Despite significant technology spending, many are not realising expected productivity gains or efficiency, the report indicated. Many traditional banks still employ cost-to-serve models, which can be up to 10 times more costly to run.
AI A Game Changer
AI implementation could be a game changer in banking, although many banks still struggle on this front. If AI has not yet worked for every bank, it might be more because of scale constraints and a lack of widespread employee and consumer adoption than because of technical problems, the report suggests.
"Most banks are frustrated with slow value realisation from AI and gen AI. The new technology hits the formidable walls of legacy infrastructure and, more importantly, legacy culture," said Saurabh Tripathi, BCG managing director and senior partner.
Banks need to also implement machine voice and agentic AI as they become more important productivity levers. However, AI might not be enough on its own. Since nonbank players are currently in a better position to profit from its applications, they may be able to grab a large portion of the potential value.
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