The keyword for banking in 2025 and beyond is change. Banking customers are changing – both in terms of profile, and expectations, the market is changing, competition is changing, and decades old business models are changing too. For traditional banks, the writing is on the wall – this year they must prioritize technology transformation to keep pace with the rapidly evolving market landscape. They need to move from siloed, rigid, and monolithic infrastructure, to modular, composable technology foundations that will help them leverage emerging trends and deliver superlative customer experiences. But the challenge before them is balancing innovation with cost and risk. And this is a challenge that must be addressed with some careful strategizing.
The Changing Banking Customer
The customer lies at the heart of the transformation sweeping across banking and financial services. And there are a few noticeable trends that the sector is witnessing with respect to their customers.
First, younger, more digitally savvy customer segments are now entering the formal banking economy. They want digitized, on-demand services, but they also expect banks to act as trusted advisors and partners rather than just a transactional service provider.
Second, customers across demographics now expect the kind of personalization from banking that they experience with other providers like Netflix or Amazon. They want banks to know their preferences, understand their needs, and provide them with products and services that meet those needs.
And third, customers are increasingly demanding frictionless access to financial services. If they are shopping online, then they want to be able to pay for their purchases on the ecommerce provider’s platform without having to leave and access their banking app. If they are buying a car at a retailer, then they want to be able to avail of their loan options there itself without having to contact their bank separately.
The banking sector’s attempts to ensure customer centricity, coupled with the emergence of new technologies, have opened new revenue and business models that have the potential to transform banking as we knew it.
The Changing Business Models
Over the last few years, we have witnessed the rise of an API economy with increasing integrations between banks and third-party businesses to improve the customer experience. Open banking is already a reality today, with considerable regulatory push behind it. The number of open banking API calls across the world is expected to surge 427 percent from 137 billion in 2025 to more than 720 billion by 2029.1 This API-powered business model is already expanding beyond just payments into open finance – a wider range of financial services ranging from mortgages and insurance, to pensions and investments. Banks must make customer data available to third-party businesses, so customers can get products and services they need for their requirements. There will be further growth in embedded finance, Banking-as-a-Service (BaaS), and banking ecosystems, as the sector continues to focus on delivering customer centric, personalized, and frictionless engagement. The embedded banking market is expected to increase from USD 20.3 billion in 2024 to USD 149 by 2034 and the BaaS market is expected to grow to USD 60 billion by 2033 from USD 12 billion in 2023, growing at a 17 percent CAGR.2&3
The Changing AI Possibilities
The rapid development of Artificial Intelligence (AI) and the emergence of generative AI models holds significant promise for banking and financial services. In the new API-powered, customer-focused economy, data is gold, because proper analysis of customer data holds the key to effective personalization. Banks have large volumes of customer data that they must leverage fully to bolster their transformation efforts. AI can deliver data-backed insights for better and faster decision making.
Banks are already cashing in on generative AI’s natural language processing capabilities to improve customer service via intelligent chatbots. The emergence of autonomous models like agentic AI will usher in further innovation and service efficiency. For example, AI agents can analyze customer behavior, past relationship with the bank, and balance information in real time to offer customers proactive investment, budgeting, or wealth management advice. AI models can be leveraged by banks to bolster cyber security and fraud detection practices as well.
The Cost vs. Innovation Balance
The digital transformation journey has progressed from digitizing assets, and processes, to leveraging the API economy and new business models, and using AI to drive innovation strategies. Investments in robust, composable, and modular technology foundations must be a top priority for organizations in 2025 and beyond. Unfortunately, IT spending was expected to make up just 11.2 percent of total expenses in 2024, and this trend is likely to continue in 2025, as a result of global economic slowdown and market instability.4 And even within this constricted spending, the largest portion is expected to go to maintenance and the lowest to innovation. Many organizations also don’t want to incur the cost and risk of transforming legacy core banking systems that continue to power banking operations today.
This poses a conundrum, as traditional banks cannot deliver on the promise of relationship-based personalized services or tap into emerging business models without a strong technology foundation. And if they don’t, they will not be able to win the battle for the share of wallet, as modern customers are not hesitant to switch loyalties to fintechs or other organizations that give them what they need.
A Middleware Solution
But banks don’t really have to spend huge amounts of money on transforming their cores. They can instead choose to deploy a powerful, cloud-native, microservices-based, and modular middleware platform over their legacy core to address the cost vs. future forward innovation challenge they are faced with. A middleware platform can separate the system of records from the system of engagement, facilitate seamless API integrations with external partners, and provide a robust foundation for deploying AI-based offerings. With such a platform in place, banks can easily focus on exploring open finance, or embedded banking, or even orchestrate a banking ecosystem.
Winds of change are blowing over the banking and financial sector and organizations that don’t adapt quickly will be left behind. Exciting and profitable possibilities await organizations that make the strategic shift to new business models and leverage emerging technologies to their advantage. Now is the time to make some carefully considered investment decisions to power future innovations.