Competition and Cooperation: In an AI-Dominated World (A2)

Over the past ten years, the banking industry has undergone significant change. New technologies, the growing influence of Fintechs, and the involvement of Big Tech in financial services have transformed traditional banking. At the same time, we see rising customer demands: fast, personalized, and digital services are now a must.

The central thesis of this series is that the next phase of change will be characterized by a deep integration of AI, particularly at customer interfaces. AI agents will increasingly be able to handle all interactions with customers. This comprehensive presence will fundamentally change the way financial services are delivered and experienced.

Now is the critical moment to discuss these developments. As AI reshapes the rules of the game, the balance of power between traditional banks, innovative fintechs, and powerful big tech companies will be realigned. What role will these players assume in an AI-dominated future? What might their collaboration or competition look like? And what will this mean for customers and the market?

A Look Back: Fintechs and Big Tech Over the Past 10 Years

In the past decade, Fintechs and Big Tech have emerged as key players in the financial sector. With innovative technologies and a strong focus on customer-centricity, Fintechs have set new standards that have massively influenced traditional banking. In addition to startups, tech giants have also made their ventures into the banking sector.

Successful examples like Apple Pay and Google Pay demonstrate how digital payment services have become an integral part of daily life through strong UX and seamless integration. Companies like Apple, Facebook, Amazon, and Google have also ventured out on their own in recent years. A notable example was Facebook’s Libra project, which, despite its eventual failure, highlighted how serious Big Tech is about entering the financial world.

Apple, on the other hand, has shown its commitment to developing new financial products through its partnership with Goldman Sachs and its willingness to engage in collaborations with traditional banks. The launch of the Apple Card was just the beginning; it was followed by products like “Apple Savings” and “Buy Now, Pay Later.” What’s notable is Apple’s iterative approach: products are introduced, adjusted as needed, or even discontinued, showcasing the company’s flexibility in responding to market changes.

Currently, Apple faces a significant shift: its partnership with Goldman Sachs will end within the next 12 to 15 months. However, this does not signal the end of Apple’s financial services activities. Rather, Apple plans to continue offering both the Apple Card and Apple Savings account with a new partner. The reasons for this split are diverse: dissatisfaction with customer service, regulatory investigations by the U.S. Consumer Protection Bureau against Goldman Sachs, and a strategic realignment as the bank shifts away from its consumer banking business.

A key advantage that both Apple and Google have in these developments is their direct distribution to end customers through their devices. By integrating their financial products directly into the operating system and pre-installed apps, they can roll out new services faster and more effectively to the broader market than traditional banks. This direct proximity to users gives them a decisive edge in quickly establishing new products and responding to changing customer needs.

In addition to these developments, technological change has been accelerated by open banking and API ecosystems. The banking world has been forced to open up its interfaces and enable data exchange with third-party providers. At the same time, regulatory changes such as the EU’s PSD2 directive and the Financial Market Infrastructure Act (FIDA) have provided further impetus to the sector.

These developments over the past few years have not only demonstrated how dynamic the financial sector is but also highlighted the importance of collaboration between banks, Fintechs, and technology companies. However, while partnerships have generally been at the forefront, the increasing use of AI signals a new area of tension, in which both competition and new forms of collaboration are possible.

Competition and Cooperation: How Big Tech, Fintechs, and Traditional Banks Will Operate in a World Dominated by AI

Big Tech and Fintechs have proven to be drivers of innovation in the financial sector in the past. While Fintechs excel through agility and specialized offerings, Big Tech brings its technological superiority and vast customer base to the table.

For traditional banks, the question in an extreme bot-economy environment is whether they can keep up in a future dominated by AI or if they will be limited to acting as “data providers” for third parties. There is no doubt that banks possess vast amounts of customer data, but the challenge will be to both leverage this data and retain customer access through their own offerings.

“The biggest new thing will be the growth of non-human customers.”

– Shameek Kundu, Chief Data Officer and AI Entrepreneur

This quote comes from the June 2024 Citi Report “AI in Finance,” which provides a detailed look at the future importance of AI in the banking sector. Citi recognized early on that AI chatbots and agents will fundamentally change the financial world. Particularly in dealing with “non-human customers,” or automated AI bots, the interaction between banks and clients will be redefined.

One practical example from the report illustrates how AI could make independent financial decisions on behalf of customers: an AI can, for instance, select financial products, compare interest rates, and even sign contracts based on the individual preferences of the user. This reduces the need for human intervention in routine decisions and could pave the way for entirely new forms of customer interaction.

Citi emphasizes that for banks to remain relevant, they must also tailor their products to meet the needs of these bots. Financial products must be designed in a way that they can be understood and chosen by AI, and compliance processes need to be adapted to ensure that automated decisions are transparent and traceable.

Strategic Partnerships: Are Alliances Between These Players Inevitable?

The question of whether alliances between Big Tech, Fintechs, and banks are inevitable is increasingly coming into focus. In a world where AI becomes a key capability, strategic partnerships offer an effective way to combine expertise, technology, and reach. Even today, we see collaborations aiming for win-win situations: banks provide financial expertise and regulatory experience, while fintechs and Big Tech bring access to innovative technology and a broad customer base.

The future of such alliances could be even more promising, potentially leading to new business models that blur the boundaries between these players. The key will be how effectively and efficiently AI is used, and how this technology will impact the balance of power within the financial sector. But which players will truly matter tomorrow? And who might suddenly lose their relevance?

An interesting thought was recently shared by Brian Armstrong, the founder of Coinbase, on “X” (formerly known as Twitter). He pointed out that while AI currently cannot open bank accounts, they can already own crypto wallets. AI agents can now make transactions with stablecoins like USDC on the “Base” blockchain, interacting with humans, merchants, or other AIs. While AI agents may not be able to open bank accounts independently for now, there is nothing stopping them from using existing bank accounts for payments or other transactions.

This development raises important questions about future partnerships: Who will be able to harness the best synergies in a world of AI-driven financial transactions? Banks could strategically partner with crypto providers to better meet the needs of AI agents and simultaneously strengthen their role within the digital financial ecosystem. Fintechs, on the other hand, could act as bridges, integrating traditional banking services into AI-capable platforms, effectively bridging the gap between conventional financial services and modern technologies.

Currently, traditional banks are the weakest technological players in this environment. They often lack both tech resources and the necessary talent – the “war for talent” puts banks under pressure, and the lack of network effects in distribution makes scaling digital offerings challenging. That’s why a willingness to collaborate will be critical: Which players will be able to form partnerships and build strong networks that allow them to lead in an increasingly AI-dominated financial world? A look at successful platform strategies already shows how crucial the right positioning is for success in an AI-driven financial ecosystem – particularly when it comes to distribution and dominance.

Distribution and Dominance: The Example of Microsoft with Their Product Teams

A brief detour… Microsoft Teams has quickly established itself as a dominant platform for productivity and communication. Through the integration of tools like chat, video conferencing, file sharing, and task management, Microsoft has created a comprehensive platform that simplifies the workday. The success of Teams is largely based on its ability to seamlessly integrate existing Microsoft customers into an ecosystem where all productivity tools are interconnected – reaching a critical mass of users.

The strategy behind Microsoft Teams could, in principle, serve as a blueprint for the financial sector. By creating a central platform that brings together all relevant financial services, banks and Fintechs could enable users to manage all their financial activities in one place. Such a “financial platform” would significantly simplify access to financial services, becoming a preferred touchpoint for customers – much like Teams in the corporate environment.

A key success factor for this platform strategy is embedding financial services directly into users’ daily lives. “Embedded Finance” is a central concept here: bringing financial transactions to where they make the most sense. Customers no longer have to open a banking app to make transactions but can do so directly in their usual work environment or other everyday apps. This presents a significant opportunity for banks to increase their reach and be present where their customers are.

The integration of financial services into non-financial platforms is not a new concept. The next step in this evolution could be the direct embedding of banking and AI-based financial services into daily workflows. For example, if an AI-based financial solution is integrated into platforms like Teams, Google Workspace, or Slack, users could request loans, check account balances, or authorize payments without having to switch applications. This seamless embedding not only enhances efficiency but also improves customer experience – fostering greater trust in a non-banking environment.

Europe as a Special Case: Regulation and Innovation

The EU plays a unique role in regulating AI systems, setting clear guidelines for the use of AI through the AI Act and existing data protection regulations (GDPR). These strict regulations influence global competition, particularly for European banks and fintechs that must adhere to these requirements. This raises the question of whether such legal frameworks could lead Big Tech to prioritize its innovations outside of Europe or even withdraw from the European market entirely.

A specific example is OpenAI, which does not offer its new Advanced Voice Assistant in the EU due to AI regulations. The EU AI Act prohibits AI systems capable of recognizing emotions in natural persons and using them in certain areas such as the workplace or educational institutions. Since the Advanced Voice Assistant is based on GPT-4o and responds to non-verbal cues like speech speed to detect human emotions, this functionality conflicts with European regulations. Other companies like Apple are also affected, as they need to adapt their AI products – such as “Apple Intelligence” – resulting in delays or reduced functionality in the EU.

This situation affects not only Big Tech but also European banks seeking to advance in the AI field. Many technically feasible AI applications are not allowed in practice due to the strict data protection and ethical standards in the EU. A prominent example is “credit scoring” or “social scoring.” While AI systems in other countries are already used to grant loans based on social media data, online behavior, or other non-traditional sources, European banks are skeptical of such approaches. The compliance with regulations prevents the comprehensive use of AI for innovative scoring methods, limiting the range of AI tools available to banks in Europe.

These regulations are designed to protect against discrimination and invasive data usage but simultaneously restrict innovation capacity. Both Big Tech and banks face technical and competitive challenges – from the development of new services to the efficiency of processes. The question remains whether European banks and fintechs will find an advantage in setting standards or whether the stringent regulations will hinder their ability to compete globally. On the other hand, these very regulations could bolster consumer trust – a crucial factor that will shape the adoption of AI-driven financial services. Strict data protection and ethical standards may help increase user acceptance by placing security and transparency at the forefront. In the long term, the EU could thus create a market where trust and ethically responsible use of AI form the foundation for successful financial innovations.

The increasing use of AI presents both risks and opportunities for all players in the financial sector. On the one hand, AI opens up significant efficiency gains; on the other, it requires a rethinking of customer relationships and revenue streams in the age of bots. The key question will be how to leverage AI optimally without losing customer proximity – and who will ultimately provide a platform that combines trust and added value. “Black box” approaches will not be viable, either from a regulatory standpoint or in terms of customer acceptance.

The coming years will reveal whether collaborations and strategic alliances will strengthen the financial sector or whether the disruptive power of AI will turn established structures upside down. Particularly in terms of building trust, there is still much to be done – and we will explore this topic more deeply in our next article.