As every industry grapples with the evolution of AI, major players in financial services are expected to reap the most gains from AI, but smaller players face a different reality. 

At least 10% of the banking sector, particularly smaller players with less market share and constrained digital investment capacity, are likely to be negatively affected by the increased role of AI, Charleyne Biondi, assistant vice president of digital economy at Moody’s Ratings, told FinAi News.

Smaller players “face a dual challenge: lagging in adoption while also being the most exposed to competitive pressure from AI-native entrants that can operate at lower cost and deliver highly personalized financial services,” Biondi said.  

Over time, she said, this could translate into:  

• Market share erosion,  

• Compressed margins; and  

• Consolidation among less adaptive institutions. 

The reality of capital 

While JPMorgan, RBC, HSBC and UBS lead the AI race, according to the Oct. 8 Evident AI Bank Index report, smaller FIs must be more strategic due to capital constraints.  

The $3.4 billion Academy Bank, for example, tries to be “strategic” with its new tech initiatives and aims to “try quick and fail quick” with limited capital exposure for new technology, Chief Executive Paul Holewinski told FinAi News. 

“We don’t have the budget of the biggest banks but continued and strategic investment in our tech stack has made us agile compared to other institutions,” Holewinski said. 

How small banks aim to compete 

While big banks have larger budgets, small banks have a different kind of edge in their operations, Sara Elinson, managing director and partner at L.E.K. Consulting’s financial services practice, told FinAi News. 

“For big banks, they have more capital, but there is also more competition for that capital,” Elinson said. “Big banks also have big CapEx requirements, which can sometimes make complications in testing new technology.” 

Smaller FIs on the other hand, while limited with their tech budgets, can be very strategic about the deployment of new tech like AI, which can make for faster testing, she added. 

Some examples of AI deployment among smaller financial institutions include: 

• Michigan Credit Union deploying gen AI for underwriting assistance; 

• Triad Bank using AI for underwriting; and 

• Hanscom Federal Credit Union deploying AI-driven CX to drive consumer engagement. 

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