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ight years after the financial crisis, retail banks are still struggling to function as thriving, profitable businesses with clear, focused strategies. Most are a long way from achieving the return-on-equity levels they produced prior to the crisis.  

On top of the macro challenges — tougher regulations, near-zero interest rates and persistently sluggish economic growth — they must figure out what to do about a whole new class of competitors: financial technology (fintech) upstarts brandishing an array of disruptive technologies.

Many retail banks have chosen to fend off these new rivals by taking an “all of the above” approach to strategy. They’re building digital platforms in their core businesses and setting up separate units, sometimes creating niche payment apps, for example, that could be years away from consumer adoption. At the same time, banks are taking stakes in a wide range of fintech companies, hoping to back potential winners.

Having such a diverse set of activities means that banks are not making necessary strategic trade-offs. Also, by worrying about fintechs, banks may be taking their eyes off a larger threat: major technology firms, including Amazon, Apple, Facebook and Google. These companies have begun to provide bank-like services to their massive networks of users.  

The speed at which this trend continues will depend, in part, on what national regulators allow. Things are moving quickly in China, for instance, where Ant Financial combines Alipay,  Alibaba’s payment business, with deposit taking and lending, effectively creating a complete online bank.

Plausible scenarios for how fintech will evolve in the next five to 10 years range from relatively contained disruption to large-scale disintermediation and substitution. Some of the most effective strategies for dealing with the digital challenge fall into five categories:

* Relationship master. Banks with a strong presence in a regional market can build on the loyalty of their existing customers by combining digital interactions with the human touch. Delivering personalized service isn’t usually a strength for fintechs, which don’t have physical roots in local communities. This strategy can be a way for regional banks to win a bigger share of their customers’ wallets.

* Back-end utility. This is essentially the opposite of the first approach. Banks can focus on core activities such as transaction processing and loan underwriting, while leaving the customer relationship management to their partners, including fintechs.

The Bancorp, a US commercial bank that has no branches, has embraced this strategy. It works with more than 100 non-bank partners. This model requires an open application program interface that connects seamlessly with other firms’ technology platforms.

* Digital category killer. This involves jettisoning the “all of the above” approach to digital banking and focusing on an area where a firm has a natural advantage. Charles Schwab, for example, capitalized on its large customer base for asset management and brokerage services to build an online bank that takes deposits, issues credit cards and makes loans.

* Digital scale insurgent. This is the most ambitious model, one that may well be beyond the reach of many banks. It involves transforming the entire bank into an agile, innovative company and requires sufficient capital to invest in technology and talent.

Management must maintain an “insurgency mindset,” a willingness to persist on what might be a long and painful journey, where financial returns may take time to materialize.

* Cash conservationist. This is the white-flag option, but one that can still produce a good outcome for shareholders. Banks that don’t have the wherewithal to pursue any of the other four approaches can stick with their existing operating model, while trimming costs and capital expenditures.

Regional banks in distressed markets may want to take this tack. If a bank effectively conserves cash and maintains a credible track record, it may become attractive to acquirers.

As banks face competition from new firms and new technologies, they can no longer afford to keep all their options open. In order to succeed in more fluid, digital-led financial services markets, they will have to make hard choices about what type of bank they want to become.
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Joe Fielding and Edy Widjaja are partners with Bain & Company.