It may come as a surprise to many of us that consumers are generally satisfied with their banking relationships. However, this doesn’t mean that banks have nothing to worry about. Alternative providers and FinTech companies present a double-edged risk to traditional banks. First, there is the eminent danger of a customer exodus to these providers. Second — and perhaps the more threatening from an operations perspective — these alternative providers are raising the expectations for what the ideal customer experience can and should be.

According to a research report, “Don’t Fear Modernizing Your Core,” released today by NTT DATA Consulting, customer loyalty is for financial institutions in dangerous waters, as 28 million households are ready to move to a more innovative bank.

A new breed of competitors for a new set of customer expectations

Banks are increasingly aware of the threat from FinTech disruptors, because they know their customers are not only familiar with these alternatives, but find these new alternatives attractive. More than half of the US survey respondents had heard of alternative providers (like PayPal, Venmo or USAA) and 46% already have an account with one of them.

Why are these companies gaining so much traction so quickly? Consumers like and prefer the access, flexibility, and availability their products. In fact, almost a quarter (22%) of consumers who have investigated or have an account with one of these alternative providers said, “This is how banking services should be.”  But consumers aren’t just looking to online firms to meet their heightened expectations. If a leading brick-and-mortar retailer such as Target or Walmart considered offering a banking service, nearly half of all consumers surveyed — 47% — would consider using it.

Traditional banks: take notice. Consumer expectations are rising. Banks will lose customers and revenues if they can’t adapt to these changing expectations.

Combatting the threat: traditional banks have three options

Financial institutions have three logical alternatives for meet this rising tide of expectation: build, buy or partner.

• Build – Banks’ innovation skills are largely underrated. Truth be told, banks have developed and implemented many of the financial standards of modern banking (e.g., ATMs, Remote Deposit Capture, Online Banking). But innovation is occurring at a pace that is untenable for most banks in today’s highly regulated environment. When you combine the organizational costs of compliance with the limitations of outdated core systems, 70% of surveyed bankers do not feel their processes can quickly adapt to change. It’s easy to see that pursuing a build strategy is challenging, if not unrealistic, for most traditional banks.

• Buy – Buying a FinTech company once it has developed a product and proven its viability in the market seems like a good idea, until one realizes the extreme premium these FinTech companies now command. As a result, banks are forced to either buy before the concept is proven or pay a premium afterward that is difficult to justify to shareholders. Nonetheless, some banks are braving the buying waters as they attempt to fend off competitors in the race to reach customers with new offerings.

• Partner – Many top financial institutions have chosen to focus on a partnership model. They invest money and often strategic development resources in promising FinTech companies. This allows the financial institution to get a better understanding of which startups can best advance their strategic objectives. The bank will work with those FinTech companies to help bring their products to market.

If awareness is the first step in tackling change, then the good news is that most traditional banks are ready for step two: taking action. But how that action takes shape and how quickly it happens will make all the difference.

We believe that banks’ future success relies on their ability to 1) modernize their legacy capabilities in a timely manner to increase their responsiveness and flexibility, and 2) establish partnerships with FinTech companies whose offerings support their strategic goals. This two-pronged approach is the ultimate life preserver for dangerous competitive waters.