How Competition and Collaboration Are Transforming the Financial-Services Industry

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By John Manning, International Banker

The provision of financial services was almost exclusively the domain of the banking industry once upon a time, particularly prior to the seismic events that unfolded in 2008. Fast forward nearly a couple of decades, and that landscape is markedly different today. Thanks to a digital revolution that ushered in the age of bigtech and agile fintech (financial technology) companies keen on unbundling, disrupting and improving financial services, customers now engage with the global financial system in entirely new ways. As such, traditional financial institutions have lost ground in key areas of banking and finance over several years, prompting massive structural changes across the industry.

Indeed, the threat that tech firms pose to the legacy industry continues to mount with each passing year, with advances in digital applications such as mobile banking allowing them to integrate a broad range of financial products and services into their platforms—offerings that banks previously provided. For instance, Apple Pay and Apple Card have seized significant market share away from traditional incumbents in payment and credit services since their introductions. In 2024, there were an estimated 61.3 million Apple Pay users and 12 million Apple Card users in the United States.

In emerging markets, meanwhile, the major competitive threat from tech firms is most visibly observed in the payment sector. A research paper, “Regulating big techs in finance,” published in August 2021 and written by Agustín Carstens, Stijn Claessens, Fernando Restoy and Hyun Song Shin of the Bank for International Settlements (BIS), reported that two bigtech payment firms jointly account for 94 percent of China’s mobile-payment market. “The rapid growth in payment transactions within a few years shows how quickly big tech firms can establish their footprints,” the study noted. “Beyond payments, big techs have also become lenders to individuals and small businesses in some markets, as well as offering insurance and wealth management services.”

With many lenders broadly proving slow to respond and adapt to this competitive threat, tech’s growing presence is introducing complex challenges to the traditional-banking industry. As these new market entrants are able to nimbly offer streamlined, customer-friendly banking options in areas such as retail loans and credit-risk management, banks face the prospect of losing significant market share across a range of areas. Again, China provides a clear demonstration of this changing market dynamic, with bigtech credit reportedly experiencing an average annual growth rate of 37 percent between 2020 and 2021 compared to bank credit’s growth rate of just 13 percent.

The introduction of tech firms into traditional-banking spaces, therefore, is having a dramatic impact on the nature and composition of the financial-services industry. A June 2024 study, “BigTech, FinTech, and banks: A tangle or unity?” by Sitara Karim of Sunway Business School, Sunway University, Malaysia, and Brian M. Lucey of Trinity Business School, Trinity College Dublin, Ireland, sought to analyse the impacts of bigtech and fintech financing on traditional banking’s dynamics across personal loans, credit risk and bank performance. The research study found that both bigtech and fintech have a dual impact: They disrupt traditional banking’s practices by reducing personal loans and altering credit risk, but they also enhance banks’ performances by driving technological adaptations and innovations.

“Small-sized banks are more susceptible to credit risk, indicating [a] negative relationship. But more opportunities persist for them in the avenues of personal loans and profitability,” the research also concluded. “In contrast, larger banks reflect greater challenges for adapting to new technologies into their well-established banking operations.”

Perhaps such results explain why larger banks are keen to partner with agile fintechs and thus acquire the capacity to provide the latest, most cutting-edge solutions for their clients. Indeed, while heightened competition is certainly one outcome of the tech sector’s forays into financial services, it is not the only one—collaborative opportunities abound across the industry. Initial examples of such partnerships were largely characterised by tech firms providing back-end services to banks, such as cloud computing services, and innovative proprietary solutions to help them more efficiently and accurately complete the trade cycle.

J.P. Morgan’s Securities Services’ September 2023 partnership with AccessFintech, for example, enabled the bank’s clients to access tax-reclaims data with near real-time updates flowing through AccessFintech’s Synergy network. “Clients can now access J.P. Morgan’s Tax Reclaims data set via AccessFintech UI or APIs, providing them an end-to-end view of their Custody portfolio via one centralized platform,” Naveen TV, global head of data strategy and integrations for securities services at J.P. Morgan, said of the partnership.

More recently, such collaborative relationships have also been increasingly positioned to more ably support the bank’s frontend, with traditional lenders often deepening their ties with fintechs to increase their access to state-of-the-art technology and a suite of financial solutions. JPMorgan Chase’s partnership with OnDeck Capital, for example, aims to improve the loan-application process dramatically for small businesses, namely by combining the US bank’s extensive customer network with OnDeck’s innovative and agile approach to lending.

Banks also frequently provide their advanced infrastructures to their non-banking tech partners to enable them to seamlessly offer financial services, such as payments and loan products, on their platforms. This type of partnership often manifests as a banking-as-a-service (BaaS) arrangement. “The benefit for banks participating in banking-as-a-service (BaaS) models is increasing deposits and revenue (interchange, interest) at a relatively low cost (no customer acquisition cost),” S&P Global Market Intelligence noted in an August 2023 report. An analysis by S&P of 42 community banks that offer BaaS found that their deposits increased by 18 percent on average between the first quarter of 2022 and the first quarter of 2023, whereas the deposit growth among other US banks with less than $10 billion in assets was “essentially flat” during the same period.

That said, banks remain in fierce competition with non-traditional entrants to own the customer relationship in such sectors as payments, with the likes of PayPal and Alipay as their biggest competitors over the next few years. “However, the proportion of respondents believing this has declined over the past few years—perhaps as banks choose instead to partner with players like Wise,” Economist Impact noted in its October 2023 report “Byte-sized banking: Can banks create a true ecosystem with embedded finance?”

As neither sustained competition nor collaboration presents the ideal fit for banks, outright acquisition of these tech upstarts may prove the most viable route for them to pursue. As many as 44 percent of the Economist Impact report’s surveyed respondents, comprising 300 executives in retail, commercial and private banking spanning Europe (25 percent), North America (23 percent), Asia-Pacific (18 percent), Middle East and Africa (17 percent) and Latin America (17 percent), stated that banks would acquire majority stakes in fintechs, while 32 percent projected there would be market consolidation among challenger banks in the next one to three years. Both of these figures are much higher than the 41 percent and 23 percent, respectively, that were recorded in the 2021 version of the report.

It should also be noted that the growth of tech firms’ presence within the banking sector has significant implications for the banking value chain, which could trigger further regulatory action. “The complexity of partnerships and expansion of tech firms, particularly big techs, in delivering banking services across multiple jurisdictions without consolidated oversight, limits visibility for regulators,” an October 2024 paper by the BIS’s Financial Stability Institute (FSI) entitled “A two-sided affair: banks and tech firms in banking” noted. “If left unchecked, this could have significant implications for public trust, a fundamental pillar for the soundness of the banking system, and consequently financial stability. Therefore, additional actions at the national level, supported by international policy cooperation, could be warranted.”

Regulators are already wary of this changing landscape and its implications for consumers. “Big Tech firms—usually including Facebook (Meta), Google (Alphabet), Apple and Amazon—can bring benefits to consumers of retail financial services by effectively and fairly competing with incumbent providers and other new entrants, including fintech firms. They can provide innovative, efficient products and services,” the United Kingdom’s Financial Conduct Authority (FCA) reported in an October 2022 paper entitled “Potential competition impacts of Big Tech entry and expansion in retail financial services”. “However, based on evidence from Big Tech firms’ core markets and their expanding ecosystems, competition risks could arise in the future from them rapidly gaining market share, markets ‘tipping’ in their favour, and potential exploitation of market power that would be harmful to competition and consumer outcomes.”

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