Purpose: The study examines the mediating role of service innovation in the relationship between competitive strategy and financial performance of banks in Lagos, Nigeria. Drawing on Competitive Advantage Theory and the Resource-Based View, the study seeks to explain how strategic positioning translates into financial outcomes through innovation capabilities.

Methodology/Design: A cross-sectional survey design was employed, with data collected from 312 middle and senior-level management staff across deposit money banks in Lagos using a structured questionnaire. Competitive strategy, service innovation, and financial performance were measured using validated scales. Data were analyzed using partial least squares structural equation modeling (PLS-SEM) with SmartPLS 4, following a two-step approach for measurement model assessment and structural model testing.

Findings: The results indicate that competitive strategy has a positive and significant effect on both service innovation (β = 0.532, p < 0.001) and financial performance (β = 0.412, p < 0.001). Service innovation also positively affects financial performance (β = 0.384, p < 0.001). Furthermore, service innovation partially mediates the relationship between competitive strategy and financial performance (β = 0.204, p < 0.001). The model explains 46.7% of the variance in financial performance.

Implications: The findings suggest that bank managers should align innovation investments with strategic priorities to maximize financial returns. Competitive strategy alone is insufficient; banks must develop service innovation capabilities to fully realize performance gains. Policymakers may consider frameworks that encourage innovation while maintaining sector stability.