Incumbent banks possess decades of historical consumer records, but legacy mainframe architectures and fragmented systems prevent effective algorithmic use. Just as Blockbuster failed to build search algorithms despite store traffic, data volume only creates competitive advantages when paired with a technology-first culture and modern infrastructure.

The 'SaaS apocalypse'—where agile, AI-powered startups can quickly disrupt established players—is less of a threat in fintech. Strict regulatory bodies like the FCA create a significant barrier to entry, slowing down disruption and protecting incumbent companies.

The AI revolution may favor incumbents, not just startups. Large companies possess vast, proprietary datasets. If they quickly fine-tune custom LLMs with this data, they can build a formidable competitive moat that an AI startup, starting from scratch, cannot easily replicate.

While AI can write code, Affirm CEO Max Levchin states it can't replicate the true moats of a fintech company. These include deep capital markets relationships, a full suite of money transmitter licenses (which take ~18 months to acquire), and years of building consumer trust.

Fears of AI disrupting payment incumbents are overstated. These companies are protected by significant moats, including complex regulatory compliance (KYC/AML), decades of proprietary data inaccessible to LLMs, strong network effects, and essential direct sales channels to small businesses.

AI favors incumbents more than startups. While everyone builds on similar models, true network effects come from proprietary data and consumer distribution, both of which incumbents own. Startups are left with narrow problems, but high-quality incumbents are moving fast enough to capture these opportunities.

True defensibility against AI disruption lies not in the AI model itself, but in the ecosystem around it. Incumbents like Intuit have a significant advantage in deploying "agentic AI" because they possess proprietary data, mass distribution, and the brand trust needed for users to grant financial access.

Contrary to viewing regulation as a barrier, its presence in sectors like banking is an asset for AI. Regulation enforces well-defined operating rules and excellent data hygiene, creating a structured, predictable environment where AI agents can be trained and deployed effectively.

While partnering with banks is essential for launching a fintech, at a certain scale, obtaining a direct banking charter is crucial. It provides direct regulatory relationships, greater control over product development, and a better customer experience, as Mercury Bank is pursuing.