Neobanks & Incumbents: Leveraging Technology, Gen AI, and Cross-Industry Collaboration for Profitable Growth

The neobanking sector, once the epitome of financial innovation, now stands at a crossroads. What began as a digital-first revolution with customer-centric models has now been met with stark realities—profitability challenges, regulatory scrutiny, and stiff competition from well-capitalized incumbents.

A recent article by Sally Hickey, published in The Banker, “Is the Honeymoon Over for Neobanks?” paints a sobering picture of these struggles, highlighting that neobanks have failed to capture primary banking relationships at scale despite rapid customer acquisition. Simultaneously, incumbent banks have modernized their digital capabilities, making it harder for neobanks to maintain a unique value proposition.

However, this period signifies an evolution rather than marking the decline of neobanks. Technology, especially Generative AI (Gen AI), coupled with deeper cross-industry collaboration, presents a new paradigm for growth and resilience. As a leading partner in the financial services ecosystem, Coforge has worked extensively with neobanks, fintech, incumbents, and regulators. From deposit and lending platforms to SME-focused digital banks, cloud-native infrastructure, and AI-powered innovations, our vantage point provides unparalleled insights into the future of banking.

Let’s explore why technological transformation, AI adoption, and collaborative ecosystems must be at the center of banking strategies—not only to address current challenges but to unlock sustainable profitability and broader financial inclusion.

The New Reality: Why the Old Playbook No Longer Works

Neobanks emerged as disruptors in a low-interest-rate environment, capitalizing on mobile-first banking, superior UX, and fee-free models. However, they now face structural challenges:

• Funding and Interest Rate Pressures: With rising interest rates, neobanks struggle to compete with traditional banks with robust lending portfolios.
• Regulatory and Fraud Concerns: Many neobanks, in their rush for rapid customer growth, have faced compliance failures, leading to fines and loss of consumer trust.
• Customer Retention and Monetization Issues: While millions have opened accounts with neobanks, only a tiny fraction use them as primary banking providers.

These hurdles necessitate a fundamental shift in how neobanks and incumbents leverage technology and innovation.

How Gen AI is Redefining Banking

The rapid evolution of AI in financial services is not just an opportunity but a necessity. Neobanks and incumbents must embrace Gen AI to unlock new efficiencies, enhance customer engagement, and strengthen risk management. Here’s how AI is driving the next wave of banking innovation.

1. Hyper-Personalization at Scale

AI-driven banking has been evolving for years, but Gen AI takes it to a new level. Instead of reactive banking, Gen AI enables predictive and hyper-personalized financial experiences.

• For Neobanks: AI-powered personal finance assistants can offer real-time insights, intelligent savings plans, and automated wealth-building strategies, making Neobanks indispensable to customers' financial lives
• For Incumbents: Gen AI can leverage decades of transactional data to provide tailored product recommendations, automate financial planning, and enhance customer retention.

With AI-driven hyper-personalization, the goal is no longer just to acquire customers but to embed banking into their daily financial decisions.

2. Next-Gen Risk and Fraud Prevention

Neobanks have been hit hard by financial crime due to weaker fraud controls and rapid onboarding practices. AI offers a solution by enabling:

• Real-time anomaly detection: AI models can spot suspicious activity before fraud occurs, reducing financial crime losses.
• Adaptive security protocols: AI-driven risk assessment allows dynamic transaction monitoring, adjusting in real-time to mitigate threats.
• Regulatory automation: AI-driven compliance monitoring can streamline KYC, AML, and transaction reporting, reducing operational costs and avoiding penalties.

For neobanks to survive regulatory scrutiny, Gen AI-powered risk engines are no longer optional but essential.

3. AI-Powered Cost Optimization

Both neobanks and incumbents need to drive down operational costs while maintaining customer-centricity. Gen AI offers:

• Automated customer support: AI chatbots and virtual assistants can handle up to 80% of routine queries, cutting costs while improving service.
• Back-office automation: AI can streamline loan approvals, credit scoring, regulatory reporting, and reconciliation, leading to leaner operations.
• AI-driven decision-making: With AI-enhanced financial modeling, banks can optimize capital allocation and risk assessment, boosting profitability.

For incumbents, this means revamping legacy cost structures, and for neobanks, it provides a path to profitability.

Beyond Banking: The Case for Cross-Industry Collaboration

The next frontier of neobanking success will not be confined to financial services alone. Instead, neobanks and incumbents must embed themselves in broader digital ecosystems.

1. Banking-as-a-Service (BaaS) & Embedded Finance

Banks must move beyond traditional banking by embedding financial products into third-party platforms. This is where cross-industry partnerships will redefine the sector.

• Neobanks: Can offer white-labeled banking solutions to e-commerce, gig economy platforms, and SMEs, creating new revenue streams.
• Incumbents: Can leverage Open Banking APIs to collaborate with fintech, enabling seamless lending, payments, and financial management solutions.

Example: Imagine a neobank partnering with an e-commerce platform to offer instant SME financing at checkout. This is the future of seamless, contextual banking.

2. AI-Enabled Cross-Sector Synergies

Financial services can no longer operate in silos. AI-powered partnerships with retail, healthcare, travel, and logistics can unlock new revenue models:

• Retail & Payments: AI-driven Buy Now, Pay Later (BNPL) solutions can personalize consumers' credit options in real-time.
• Healthcare & Insurtech: AI can enable automated insurance underwriting, offering customers tailored policies based on financial behavior.
• Smart Cities & Mobility: Neobanks can integrate with mobility platforms, offering real-time financial solutions such as fractional vehicle ownership and subscription-based banking.

By integrating AI-driven financial services across industries, banks can expand beyond traditional profit pools and embed themselves into everyday economic activities.

Convergence: The Future of Banking Lies in Collaboration, Not Competition

The rivalry between neobanks and incumbents gradually evolves into a more symbiotic relationship. While neobanks bring agility and cutting-edge technology, incumbents hold the advantage of scale, capital strength, and regulatory expertise.

Three Key Strategic Moves for the Future

• Neobanks must embrace multi-channel monetization: Expanding beyond fee-free models to subscription banking, embedded finance, and SME lending will be crucial.
• Incumbents must adopt neobank agility: By modernizing legacy cores, leveraging cloud-native platforms, and embedding AI, they can future-proof their operations.
• Cross-industry collaboration must be prioritized: Banking must be integrated into broader digital ecosystems, whether through AI-powered BaaS, embedded lending, or insurtech partnerships.

Conclusion: Technology, AI, and Collaboration as the Path to Banking’s Future

The neobanking honeymoon may be over, but the real transformation is just beginning. Technology is no longer an enabler—it is the core driver of banking's next chapter.

Whether it’s cloud-native infrastructure, AI-driven hyper-personalization, real-time fraud prevention, or embedded finance, the banks that succeed will be those that reimagine banking as a platform—not just a service.

At Coforge, we continue to shape this future, helping banks, fintech, and regulators build the next generation of financial services through AI, technology, and strategic collaboration.

Need help? Contact our Banking experts to learn more about how we can support your digital transformation journey and drive sustainable growth.