Neobanks vs Incumbents: Which Banks Will Survive the Next 10 Years?

For the past decade, the narrative surrounding the financial sector has been framed as a David-versus-Goliath battle: agile, user-friendly neobanks against slow-moving, bureaucratic incumbents. Investors are often pushed to decide whether to hold onto their shares in giants like Lloyds and Barclays or to bet on the disruptive potential of fintech stocks. The common debate revolves around better mobile apps versus the security of established branch networks, or lower fees versus a trusted brand name.

But what if this entire framework is a misdirection? From a sector analyst’s perspective, the survival and long-term profitability of financial institutions will not be decided on the surface. The real war is being fought in the engine room, over the control of the industry’s essential, and often invisible, infrastructure. This is a battle for the financial « plumbing »—the payment rails, the data APIs, the regulatory licenses, and the compliance systems that underpin every single transaction.

This analysis moves beyond the superficial « app vs. branch » debate. Instead, we will dissect the different layers of the financial stack to identify where the true, defensible moats are being built. By understanding who owns the « toll roads » of finance, investors can make a more informed decision about which institutions are truly built to last the next ten years and beyond.

This article provides an analytical framework for investors, exploring the core infrastructural pillars that will dictate the winners and losers in the evolution of finance. The following sections break down the key battlegrounds, from embedded finance to the critical role of payment networks.

Embedded Finance: Why Every Software Company Is Becoming a Fintech?

The most profound shift in finance isn’t coming from new banks, but from non-bank entities integrating financial services directly into their existing software. This is embedded finance: the concept that any software platform with a captive audience can offer services like payments, lending, or insurance at the point of need. For investors, the key insight is that this model often proves more profitable than the core software offering itself.

Consider the restaurant tech platform Toast. While it sells software subscriptions, its payments division is the true engine of its business model. The value isn’t just in the monthly fee for the software; it’s in taking a small percentage of every single transaction that flows through its system. In fact, Toast’s payments revenue of $4.1 billion dwarfs its subscription revenue of $706 million, proving that controlling the financial plumbing is far more lucrative than simply providing the front-end application.

This trend signifies a fundamental change. The most valuable fintechs of the future may not be the ones with a banking charter, but the ones providing the critical, underlying infrastructure that allows every company to become a finance company. This is a far more scalable and capital-efficient model than trying to build a bank from scratch.

Open Banking: How Is Data Sharing Changing the Mortgage and Lending Market?

If embedded finance is about adding financial pipes to software, Open Banking is about standardizing the flow of data through those pipes. By mandating that banks allow customers to share their financial data with trusted third parties via APIs, regulators have created a new layer of infrastructure. This has profound implications for markets like lending, where information is the most valuable commodity.

Initially, the primary use of Open Banking was through Account Information Services (AIS), which aggregate a user’s transaction history to power budgeting apps or provide financial advice. However, the market is rapidly evolving towards a more active use case: Payment Initiation Services (PIS). These services allow direct bank-to-bank transfers, bypassing traditional card networks like Visa and Mastercard. With a 35% year-over-year growth for PIS, the market is signaling a clear move from passively viewing data to actively using it to move money.

This evolution from AIS to PIS is critical for investors. While AIS created value by enabling better analytics, PIS fundamentally challenges the economics of the existing payment rails by offering a lower-cost alternative for merchants and service providers.

As the image suggests, Open Banking allows for the convergence of scattered financial data into a unified point of control. For a mortgage provider, this means getting a real-time, verified picture of an applicant’s financial health, rather than relying on outdated, self-reported documents. This reduces risk, speeds up underwriting, and ultimately lowers costs.

The table below, based on recent market analysis from Fortune Business Insights, highlights the distinct roles and trajectories of these two key segments within the Open Banking ecosystem.

Robo-Advisors: Will AI Replace Human Financial Advisors for the Mass Market?

Wealth management has long been a high-margin business for incumbent banks, but one largely reserved for high-net-worth individuals. Robo-advisors, powered by algorithms and AI, are a form of automated financial plumbing designed to democratize this service for the mass market. By using simple questionnaires to determine risk tolerance, these platforms can automatically construct and manage a diversified portfolio at a fraction of the cost of a human advisor.

The rise of robo-advisors is perfectly timed to meet a demographic tidal wave: the « Great Wealth Transfer. » As an estimated $84 trillion passes to younger, more digitally-native generations, the traditional advisory model is facing an existential threat. A Natixis Investment Managers survey found that 41% of advisors see this transfer as a major threat to their business, as the new generation of investors is far more comfortable with automated, low-cost digital solutions.

From an investment standpoint, the question isn’t whether AI is « smarter » than a human advisor, but whether it can deliver « good enough » results for a large enough market at a much lower cost. For the vast majority of investors with straightforward needs, the answer is increasingly yes. The scalability of this model is its key strength; a single algorithm can serve millions of clients, whereas a human advisor can only handle a few dozen.

The projected growth trajectory, as detailed in the table below, underscores the massive market opportunity. The efficiency of this automated « plumbing » is set to capture a significant share of the wealth management industry.

While high-net-worth clients will likely always demand the bespoke service of a human, the mass market is ripe for disruption. The companies that build the most trusted and efficient robo-advisory platforms are creating a new kind of financial infrastructure for wealth generation.

The Plumbimg of Finance: Why investing in Visa/Mastercard Is Safer Than Betting on Crypto?

The ultimate expression of the « financial plumbing » thesis lies with the payment networks. Companies like Visa and Mastercard operate the quintessential « toll road » moat. They don’t create the destinations (the merchants) nor do they manufacture the cars (the bank accounts or fintech apps). They simply own the highway that almost every transaction must travel on, and they collect a small fee for every vehicle that passes through. This is one of an investor’s most sought-after business models: a mission-critical duopoly with immense network effects and pricing power.

This is the fundamental difference between investing in a payment rail and a destination. A neobank, a crypto exchange, or a new payment app is a destination. It must spend heavily on marketing to attract users and differentiate itself. Visa and Mastercard, on the other hand, are agnostic. They win regardless of which bank or app the consumer chooses to use. Their position is so entrenched that even government-backed initiatives struggle to compete at scale. For example, the US government’s FedNow real-time payment rail has seen slow uptake, with only 1,800+ institutions joining since 2023, 96% of which are small.

This image perfectly captures the investment thesis. While endless innovation happens at the destination level—new shops, new services, new technologies—the toll road remains the constant, essential infrastructure. Even challengers in the space often end up reinforcing the incumbents’ position. As Mastercard CEO Michael Miebach noted on an earnings call regarding new payment systems:

We have stayed close to these systems in various other countries, in the end, ending up partnering with most of them. We’ll have to see where it goes.

– Michael Miebach, Payments Dive

This is why, from a risk-adjusted return perspective, investing in the established financial plumbing of Visa and Mastercard is fundamentally safer than betting on a specific cryptocurrency or a new fintech app that may or may not gain traction. The rails are the moat.

The Licence Barrier: Why Is It So Hard for Fintech Startups to Become Full Banks?

If payment rails are the technical plumbing of finance, then regulation is its legal plumbing. For an investor, one of the most powerful—yet often underestimated—moats protecting incumbent banks is the « license barrier. » Acquiring a full banking charter is an incredibly arduous, time-consuming, and expensive process. It requires navigating a labyrinth of capital requirements, compliance checks, and intense regulatory scrutiny.

This barrier serves a dual purpose. It protects consumers by ensuring that only well-capitalized and properly managed institutions can hold deposits. But from a strategic perspective, it also drastically limits competition. Many promising fintechs, like Revolut or Chime in their early days, operate for years without a full charter, relying on partnerships with licensed « sponsor » banks to offer FDIC-insured accounts or issue debit cards. This arrangement caps their potential revenue and keeps them dependent on the very incumbents they seek to disrupt.

The difficulty of clearing this hurdle means the market for true banking services is far less crowded than the market for financial apps. Even in the related space of embedded banking infrastructure, the market is highly fragmented. Market research indicates that Stripe, a clear leader, held only about a 3% market share in 2024. This suggests that no single player, not even a dominant one, has found it easy to conquer the heavily regulated landscape. The license itself becomes a rare and valuable asset.

For investors, this means that while a fintech might have a superior product or a better user experience, its inability to become a full bank fundamentally limits its business model and long-term valuation. Conversely, an incumbent bank’s license is a significant, tangible asset that provides a deep, government-enforced moat against new entrants. The few fintechs that do manage to successfully acquire a charter, like SoFi, instantly join a more exclusive and protected club.

Coinbase vs Uniswap: Why Holding Your Own Keys Matters for Asset Safety?

The rise of digital assets has introduced a new and critical piece of financial plumbing: custody. The debate between using a centralized exchange like Coinbase versus a decentralized protocol like Uniswap boils down to a single, fundamental question for investors: who holds your assets? This is the concept of custodial versus self-custody, and it represents a core divergence in investment philosophy and risk management.

When you hold assets on Coinbase or within a traditional bank, you are engaging in custodial services. The institution holds the private keys to your assets on your behalf. This offers convenience and recourse—if you forget your password, you can recover your account. However, it also introduces counterparty risk. You are trusting that the institution is solvent, secure from hackers, and will not restrict your access to your own funds. The history of finance is littered with examples of custodial failures, from bank runs to exchange collapses.

Self-custody, exemplified by using a personal wallet to interact with a protocol like Uniswap, is the digital equivalent of holding physical cash or a gold bar in your own safe. You, and only you, hold the private keys. This eliminates counterparty risk—there is no institution that can go bankrupt or freeze your assets. However, it introduces absolute personal responsibility. If you lose your keys, your assets are gone forever. There is no one to call.

For an investor, the choice is not about which is « better, » but about which risk they are more comfortable with. Are you more concerned with the risk of institutional failure (custodial risk) or the risk of personal error (self-custody risk)? This decision is the final and most personal layer of financial plumbing, determining who has ultimate control over the asset itself.

Premium or Freemium: Which Pricing Model Disrupts Incumbents Better?

Once the financial plumbing is in place, a critical strategic choice emerges: how to price the service. The two dominant models in the fintech space, freemium and premium, represent fundamentally different approaches to market disruption and profitability, each with distinct implications for an investor.

The Freemium model is the classic disruption tool. It involves offering a core set of services for free to attract a massive user base, with the goal of upselling a small percentage of those users to paid, « pro » features. This model prioritizes user acquisition and network effects over immediate profitability. For a neobank, this might mean a free checking account and debit card, with fees charged for services like international transfers or investment products. For an investor, a freemium play is a bet on scale: that the company can grow large enough to make the economics of its few paying customers work, or find alternative monetization routes like data analytics or interchange fees.

The Premium model, conversely, is focused on value from day one. It targets a smaller, more specific customer segment willing to pay for a superior product or a specialized service. This model prioritizes average revenue per user (ARPU) and a faster path to profitability. Think of a wealth management platform for accredited investors or a compliance software for financial institutions. An investment in a premium-model company is a bet on the strength of its value proposition and its ability to command high prices in a niche market. It is often less about disruption and more about serving an existing, high-value need better than anyone else.

From an analytical perspective, neither model is inherently superior. Freemium models, like Robinhood’s, can attract millions of users quickly but may struggle with profitability and customer loyalty. Premium models may grow more slowly but often boast higher margins and lower churn. The key is aligning the pricing model with the target market and the underlying cost structure of the business.

How to Reduce Churn in a B2B SaaS Business targeting UK SMEs?

Even with the most sophisticated financial plumbing and a perfectly calibrated pricing model, a business can fail if it cannot retain its customers. Churn—the rate at which customers cancel their subscriptions—is the silent killer of many SaaS businesses. For a B2B fintech targeting the highly competitive UK Small and Medium-sized Enterprise (SME) market, minimizing churn is not just a goal; it is a matter of survival.

UK SMEs are a particularly demanding segment. They are price-sensitive, time-poor, and require solutions that are not only effective but also compliant with a complex local regulatory environment, including HMRC (His Majesty’s Revenue and Customs) reporting and specific UK employment laws. A fintech cannot simply offer a generic product; it must become deeply embedded in the operational workflow of the business. The stickiness of the product is directly proportional to the pain of switching away from it.

The key to reducing churn in this market is to move from being a simple « tool » to becoming indispensable « infrastructure. » This is achieved by focusing on three core areas: deep integration with other essential business systems (like accounting software), proactive, localized support that understands the specific challenges of UK businesses, and a product roadmap that constantly adds value and anticipates future regulatory changes. A customer is far less likely to churn if the fintech’s software is the system of record for its payroll, is linked to its tax filings, and is the primary interface for managing employee pensions.

By making themselves an inextricable part of an SME’s daily operations, B2B fintechs in the UK can build a powerful moat based not on technology alone, but on operational indispensability. This is the final, and perhaps most important, layer of the financial plumbing.

For an investor, the ultimate question is not whether neobanks or incumbents will « win, » but where the most durable sources of value lie within the evolving financial ecosystem. By shifting focus from the shiny front-end applications to the essential back-end plumbing, a much clearer picture emerges. The companies that own the rails, control the data flows, and navigate the regulatory labyrinth are the ones building the truly defensible moats. The next decade in finance belongs to the plumbers.