Neobanks, AI, and the End of Banking as We Know It

Illustration by Xinyue Deng

The end of traditional banking?

The rapid rise in fintech and breakthroughs in artificial intelligence have shattered the idea that a long-standing history and expansive branch network are enough to ensure customer loyalty. Together, these changes have signaled a fundamental shift in how businesses should navigate the financial services landscape. As digital-first expectations reshape consumer behavior, neobanks and traditional banks are racing to lead the future of finance. 

Catalysts for disruption

So what forces are acting as catalysts for this change? In the U.S., the Consumer Financial Protection Bureau has moved to rewrite the United States’ long-awaited open-banking rule on an “accelerated” timetable that would force banks to give customers real-time, API-based access to their data by 2026. Similarly, Canada is following close behind: Ottawa’s 2024 Budget Implementation Act mandates the Financial Consumer Agency of Canada to license third-party providers and launch a consumer-driven banking framework in the near future. These regulatory shifts are key catalysts for change in the banking industry. For incumbents, open banking enables opportunities to monetize data access through API-based partnerships (i.e., application programming interface which allows computers to access another computer or software), product co-development, and new revenue models that move beyond traditional banking rails. For challengers, regulatory and political barriers have been among the biggest barriers faced by startups and fintechs. With the solidification of open banking, it will level the playing field, making it possible for new entrants to build detailed customer profiles and personalized experiences as easily as established banks can. According to BCG, this transition to open-API ecosystems could add, or strip, around 15 to 25 per cent of retail-banking revenues, depending on who moves first and adapts fastest in this new era.

Regulatory movement is only half of the story as customer behaviour has also shifted to a level that legacy processes struggle to meet. In a Bain & Company survey, 54 per cent of global consumers already trust at least one large technology company more than banks in general, underscoring just how little historical brand advantage has become. Today, Gen Z account holder loyalty can only be won through zero-FX fees, a 90-second onboarding flow, dark-mode UX and round-the-clock chat support. As the market becomes more and more saturated, customers no longer care about the legacy of traditional banks, opting for digital solutions that best reduce their burdens. Banks also hold significantly less switching power, as a large majority of global consumers spread their finances across at least three institutions, a pattern most obvious among Gen Z and in markets where neobanks have scaled quickly (Figure I). Taken together, open-banking mandates and widespread acceptance of digital-first solutions indicates a deeper cultural shift in financial preferences, with the time to act and innovate, being now.

Figure I – Bain

Measuring Success

As a result, traditional metrics such as branch count or raw deposit balances now reveal little about a bank’s competitiveness. Now, the north start metric is share of wallet — the percentage of a customer’s payments, savings and investments held within a single institution. Kearney notes that a larger share of wallet correlates with stronger loyalty, lower churn, and steadier revenue streams. PwC’s modeling also suggests that initiatives aimed at existing clients can return more than 70 per cent when they increase share of wallet by even a few points, drastically improving retention economics and demonstrating the importance of wallet share in today’s world.

A Crossroads

In this evolving landscape, two questions are clear for both incumbents and challengers alike: How will traditional banks retain and grow their wallet share without ceding ground to digital-native competitors? On the other side of the coin, what will neobanks have to do to finally surpass traditional banks, once and for all?

A New Playbook for Traditional Banks

In today’s technology-first era, the primary challenge for incumbent banks hasn’t been a lack of innovation, but rather a lack of integration. While many banks have launched AI-powered chatbots, behavior-driven pricing, and digital wealth tools, these efforts are often fragmented and incremental enhancements. What’s truly needed is a fundamental reinvention of core banking processes – making them digital-native from the ground up, rather than layering tools onto outdated legacy systems. Banks’ reluctance to discard its risk-averse cultures and legacy infrastructure continues to prevent them from fully enacting transformative change and seizing the full potential of AI. To stay competitive, banks must stop treating AI as a mere feature and start viewing it as a foundational lever of strategic advantage. 

1. Banks must utilize predictive, generative, and agentic AI to redefine customer engagement, operational workflows, and hyper-personalization.

Currently, traditional players are not yet prioritizing transformative technological investments (Figure II). AI should be deployed not just to enhance, but to reimagine entire value chains, from personalized wealth management tools like robo-advisors and private market access, to underwriting models that utilize real-time behavioural data. One of banks’ greatest strengths, compared to digital-native challengers, is the large amount of customer transaction data they’ve amassed over decades. However, this advantage only becomes meaningful when paired with AI to extract insights and deliver hyper-personalised experiences across credit, wealth, and payments that match or exceed fintech user experience. Moreover, by opening access to their data and offering API-based services to third-party developers through open banking regulation, traditional banks can unlock a major new revenue stream — evident in Wells Fargo’s advances to become the “partner of choice” through its API offerings and partnerships with various fintechs. 

Figure II – BCG

2. Banks must lean into a hybrid model.

Banks need to modernize their existing infrastructure by embracing a hybrid model and reducing their reliance on physical branches. Maintaining large physical branches is expensive and eats into profitability, especially when compared to the asset-light operating models of neobanks. Thus, reassessing and downsizing physical footprints where demand has shifted is essential to staying lean and competing effectively with new entrants. 

3. Banks need to continue building on their existing customer relationships.

This includes introducing AI-powered financial advisory services, embedded finance solutions integrated with third-party apps, and cross-border payment solutions. Focusing on ways to enhance the customer journey, making it as intuitive and frictionless as that of fintech competitors, while also retaining the existing strengths they possess, such as breadth of product offerings and consumer trust, is key to defending its acquired wallet share and long-term relevance.

How Neobanks Should Cross the Finish Line

Neobanks, once scrappy disruptors, are now firmly embedded in the financial mainstream. However, regulatory hurdles, stable profitability, and lack of trust among older generations still block the way to their complete domination of the financial industry. Moving forward, their continued success will hinge on three main pillars: product diversification, customer loyalty, and continued innovation at scale. 

1. Neobanks must move beyond basic chequing and savings accounts to offer lending products, mortgages, and advanced investment tools.

As underwriting software matures, fintechs will become better positioned to serve higher-net-worth and more complex client segments. This is important for neobanks to not only expand their customer reach but also prove the resilience and long-term viability of their banking model. Product diversification also unlocks more stable and varied revenue streams. Many neobanks today rely heavily on interchange fees – a small transaction fee paid between banks for the acceptance of card-based transactions – which, while steady, are insufficient on their own. To grow sustainably, neobanks need to broaden into interest-based income via lending, subscription models, and other transaction fees on services like money transfers. 

2. Customer loyalty is more crucial than ever, even just considering the crowded neobank space.

This can only be achieved by offering more product breadth. Companies like Wealthsimple are leading by example, earning more wallet share by offering a unified ecosystem that combines checking, saving, investing, and more with value-added perks like cashback or crypto access. Offering a broader suite of traditional and innovative services not only builds trust among customers but also encourages users to centralize their finances, increasing wallet share and stickiness. 

3. Neobanks need to continue trailblazing their path in innovation, especially leveraging their high-risk appetite and ability for blockchain innovation.

Neobanks, which possess a higher tolerance for experimentation in areas including blockchain, on-chain finance, and stablecoin products, are key to transforming banking processes and reimagining more convenient and beneficial options for customers. McKinsey notes that stablecoins and other forms of tokenised cash are now credible alternatives for cross-border payments, promising speed and fees measured in cents rather than dollars. In contrast, traditional banks struggle to keep pace and are encumbered by regulatory caution, creating the perfect opening for neobanks to surge ahead. 

4. Neobanks must scale smartly.

Instead of defaulting to geographic expansion, which may be hindered by regulatory and cultural barriers, they should prioritize strategic growth through M&A. Acquisitions like Wealthsimple’s acquisition of Plenty demonstrate how neobanks can quickly fill product gaps, gain new capabilities, and evolve far faster than building things organically from scratch.

A Race to Relevance

Success in this digital age ultimately comes down to a dual-sided approach that considers both relevancy and customer loyalty. In particular, legacy banks must accelerate innovation, particularly in AI and customer experience, to defend their market share. Meanwhile, neobanks must mature their offerings, build trust, and expand into more sophisticated financial products to allow them to earn greater wallet share. That said, while both sides are vying for the lead, this is not a zero-sum game. Most consumers already mix providers, combining the trust from traditional banks with the speed and financial perks of a fintech. This coexistence creates opportunity for partnerships (e.g., white-label products, shared API rails, and embedded finance integrations) and co-learning, as banks can adopt the velocity and agility of fintechs, and neobanks can borrow the trust and operational maturity of banks. However, in a world where switching institutions is as easy as deleting an app, the institution – old or new – that anticipates needs first and removes friction fastest will not only win the race, but also the hearts (a.k.a. wallets) of its customers.