Challenges for Traditional Banks

Traditional banks are navigating a complex landscape. Despite many experiencing record profits, significant changes in the competitive environment are emerging as substantial threats. The banking sector still plays a crucial role in financing growth, facilitating the energy transition, and investing in AI. However, these banks now face challenges from various directions—like agentic AI, stablecoins, alternative payment methods, real-time fund transfers, and disintermediation through platforms and private credit. They’re not just competing with each other; they also have to contend with tech companies boasting more customer data, broader reach, and larger user bases.

The traditional model, which focuses heavily on balance sheets, is feeling pressure across various segments like wealth management, payments, credit, and capital markets. As a result, traditional banks’ share of the addressable revenue pool has dropped from approximately 95% in the early 2000s to around 80% today. Projections suggest that by 2030, this could fall to 65%.

To mitigate these threats, bank CEOs should step back from day-to-day operations and prepare for issues that will significantly influence their competitive stance in the coming decade. Six key areas are recommended for focus to ensure future growth and success.

1. Find Indispensable Areas

While the size of a balance sheet remains important, being large but ineffective is worse. Larger banks are exploring new avenues where scale and innovative strategies can create greater efficiency. Successful mergers combine economies of scale with advancements in product offerings, processes, and customer experiences, leading to more cost-effective organizations poised for growth. A recent Bain analysis indicated that global bank acquisitions in 2025 featuring substantial scale and innovative elements realized about 30% higher valuations compared to those focusing solely on size.

Durable profit pools tend to favor strong leaders in specific products or sectors rather than in generalists. For instance, in U.S. retail banking, there’s a strong link between a bank’s market share and its return on assets. It’s wise to choose a niche where you can stand out.

2. Treat Customer Trust as an Asset

In today’s choice-driven environment, every digital hiccup, hidden fee, or unfulfilled promise can quickly erode customer trust. A Bain study in Brazil highlighted that consumers rate digital banks almost as trustworthy as traditional ones. Therefore, it’s essential to gauge, protect, and consistently earn trust through transparent practices, fairness, robust fraud protection, and simplification of confusing processes. Offering advice and personalized experiences could give banks an edge.

As AI usage grows, trust dynamics may shift further. While consumers may accept AI for recommendations, many are wary about its role in financial transactions due to security and privacy concerns. A recent survey indicated that consumers trust familiar payment services like Apple Pay, PayPal, and Amazon significantly more than traditional banks.

3. Innovate Before Being Disrupted

Just because existing companies struggle with innovation doesn’t mean they’re entirely stagnant; in fact, it often stems from a loss of innovative capability. Successful ideas should transition from conception to market in months, not years. Thanks to its agility, Nubank has become the largest neobank in Latin America, serving approximately 131 million customers. Previously, new features took three to four months to roll out; now, some can be available in just a week thanks to AI. Banks should foster a culture of experimentation, aiming for notable customer improvements within 90 days. It’s important to celebrate the craft of product development and empower staff to deepen client relationships.

Disruption also requires skills distinct from operational efficiency, meaning banks will need to modify their talent strategy, especially related to AI and technology. Decisions about which roles to hire for, outsource, or partner on will be crucial.

4. Adjust Your Ecosystem

Every partner can also become a competitor. The value chain can be impacted significantly by the infrastructure developed by banks. Now is the time to take charge of your ecosystem—determine where to collaborate, compete, and excel. Address issues around APIs, customer identity, risk, and payment through strategic pricing. Explore profit-sharing partnerships and selective mergers and acquisitions, and create formal pathways between banks and private credit where value can be recognized and cultivated.

5. Modernize Business Models and Technology

Modernizing technology is essential, but evolving the business model is crucial for survival. Reinvention should be driven by business needs and focused on maximizing data value. Leveraging unique data can create unmatched experiences and economic advantages. Certain data may also hold substantial value for partners. Move beyond simple upgrades to ensure speed and certainty in execution.

In this context, agent AI can expedite technological advancements and help banks rethink operations. Future customer experiences will increasingly rely on a blend of human input, digital frameworks, and collaborative AI systems.

6. Simplify for Speed

Your operational model may be an unsuspected disruptor. Complexity, sluggish governance, and outdated motivations can compromise execution speed and reliability. Simplification is key. Initiate a CEO-led effort aimed at creating an operational model characterized by speed, simplicity, and reliable execution, rather than merely cutting costs. Traditional processes can impede progress and stifle the organizational structure if specific conditions aren’t met, so it’s vital to streamline governance and realign incentives.

Revitalizing Banking

Addressing these challenges requires movements of varying lengths. In the short term, banks can take practical steps, such as pinpointing a handful of franchises to invest in, launching trust dashboards, executing rapid customer journey tests, and reevaluating partnership strategies.

Simultaneously, banks must cultivate long-term goals, including building strong leadership portfolios, embedding transparency and fairness into products, monetizing owned assets, and enhancing data utilization and execution speed.

Consider these reflective questions during your next executive meeting to help guide your subsequent actions:

• Are we growing strategically or merely expanding?
• Where is our trust faltering, and how can we mend it?
• When did we last surprise the market? What’s on the agenda for the next 90 days?
• Where can we reshape our ecosystem instead of reacting to it? What needs to change?
• Is our internal bureaucracy hindering our speed, and what can we eliminate this quarter?

The banking sector remains critical yet vulnerable. Banks that recognize the urgency of addressing these outlined issues will not only endure but potentially thrive in the coming years.