UK banks embrace digital transformation: fintech collaboration key to future success

The UK banking and financial services industry is ripe for a digital transformation, offering a myriad of challenges and opportunities on the digital frontier.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

Advancements in technology, such as Artificial Intelligence (AI), blockchain, and data analytics, have ignited intense competition, with FinTech firms driving innovation and disrupting norms. By 2029, the UK FinTech market is estimated to be valued at USD 24.06 billion. 

Traditionally, banks worldwide are known to prioritise stability and security, often leading to a cautious approach to adopting new technologies. A large proportion of financial institutions are still saddled with legacy technology and outdated IT infrastructure which limits their ability to innovate or integrate new technologies. Adoption of cloud has also been relatively slow in the UK compared to the United States and the perceived risk around adoption of emerging technologies acts as a deterrent to innovation. However, the UK industry has witnessed some positive steps with initiatives to encourage mobile banking and open banking.

As of 2024, a staggering 86 per cent of UK adults, or roughly 46 million people, use online banking. However, mobile banking adoption lags, with only 53 per cent utilising it. On the other hand, digital-only bank accounts are experiencing significant growth, jumping from 24 per cent in 2023 to 36 per cent this year.

For the banking industry, digital transformation isn't just advantageous, it's essential. It's about keeping pace with FinTechs in attracting both existing and next-generation customers. In a world where technological advancements constantly outpace traditional institutions' ability to respond promptly, digital transformation is the key to maintaining competitiveness.

Embracing transformative strategies

Institutions in the UK must strategically navigate this terrain to retain their competitive edge and remain relevant. Embracing transformative strategies becomes imperative for banks and financial service providers, not merely to endure but to flourish in this digital age. Customer centricity should be at the core of any bank's digital transformation strategy. And to achieve a high degree of hyper-personalisation - as demonstrated by retail or media – banks must be nimble and agile at their core. This requires a complete re-thinking of their architecture and data strategy, not just a replacement of the core banking system.

And while this gap in customer experience lingers, businesses are increasingly turning to prominent FinTech companies, thereby eating into the traditional market share of banks. This explains why banks are acquiring FinTechs. In 2023, the UK financial services sector witnessed the announcement of 80 merger and acquisition (M&A) transactions amounting to $1.2 billion. Interestingly, although the number of banking deals in the UK decreased from 71 in 2022 to 54 in 2023, the total publicly disclosed deal value experienced a significant rise from £4.3 billion to £6.7 billion year-on-year. This suggests that the fewer deals that did happen were larger on average, possibly involving bigger players in the banking sector.

Consolidation and partnerships are the road ahead

Such consolidation will lead to a more uniform customer experience, smoothing out discrepancies in products and services offered across different branches and customer segments. However, expecting banks to lead innovation is counterintuitive, given their scale and regulatory burden. FinTechs will continue to challenge the status quo and drive innovation in various areas of banking, such as by prioritising user experience through intuitive mobile apps and data-driven personalisation.

Large banks also have the option of exploring partnership opportunities, leveraging their extensive networks and global presence. FinTech companies, while possessing innovative products, are small and often face challenges in scaling their operations. Partnering with banks offers them access to a vast customer base and global reach that is hard to replicate. This symbiotic relationship allows banks to integrate new digital products seamlessly, while FinTechs can scale rapidly. 

Looking ahead, one can envision such continued collaboration and consolidation between UK banks and FinTechs being the primary means of navigation in the evolving digital frontier of financial services.