Do Google, Apple, Amazon and Facebook keep bankers awake at night?
The big tech firms have long built their success and growth through disruption; devouring bewildered industries that fail to compete in the digital economy.
Continued forays into new sectors fuel big tech’s growth, and it appears that the banking sector may be the next unhappy victim marked for sacrifice.Banking and big tech have had a parallel relationship of being both competitors and partners.
However, recently, there are growing signs that the relationship is not staying balanced. Big tech has begun taking the opportunity to leverage huge customer bases and digital expertise to compete with traditional banks.
Hope for the financial sector may lie in the regulators that have sought to reduce their freedom since the crisis of 2008.
Keep your friends close, keep your enemies closer
Big tech’s entry into the banking sector has been incremental, not yet taking a significant market share in financial services outside of China. The initial focus for firms has been providing technology to existing banks.
For example, Amazon Web Services provides data facilities to dozens of firms, Facebook has developed partner apps for day-to-day banking, and Captial One and Liberty Mutual have adopted Alexa as a virtual bank teller for customers.
These collaborations have been spurred by consumer demand. Fintech companies like Monzo and Starling showed that consumers are more than happy to trade a physical bank for a service that’s accessible from your sofa.
Banks and big tech have taken note- digital alternatives to traditional banking services are now both accepted and demanded by the market. Financial technology services adoption among internet users has nearly doubled during the past two years.
Enter Covid-19 and adoption of virtual banking solutions has exploded.
It’s this demand for virtual banking services that risks the partnership between banks and large tech companies not staying a reciprocal one. Key leverage for big tech is user experience and customer base.
User experience is big tech’s prowess where their well-designed, personalised platforms achieve higher daily engagement than any bank could dream of.
Combined with a huge customer base – imagine for example every Google search was complemented with the offer of a Google bank account – the potential for big tech to achieve scale to challenge traditional banks is evident.
So why are we yet to see the banks swallowed up? The first clue comes from moves big tech firms have made into consumer banking already.
Apple entered in 2018 with a credit card – partnered with Goldman Sachs, Google plans to launch consumer bank accounts later this year – partnered with Citibank, and Amazon announced it will soon be offering banking services – partnered with JP Morgan.
How big is silicon valley’s appetite?
Partnership rather than offering banking services outright points to the fear held by all big tech firms–regulation. To offer fully fledged banking, these companies would have to obtain and maintain a banking licence, submitting to increased regulatory oversight and scrutiny.
For an industry reliant on breaking norms rather than upholding them, this is not a natural step. Facebook has been the most ambitious so far, and was immediately stymied by regulatory backlash putting the brakes on a big tech finance project.
Its Libra initiative, a blockchain-based payment system and private currency that would work around central banks and governments, has been back to the drawing board since 2019.
A second clue is to look at the priorities of outcome for big tech companies.
Whilst the fine margins of financial transactions may be part of the incentive to enter banking, the true prize is financial and personal data that accompanies them.
Persuading consumers to adopt their platform for banking not only boosts advertising revenues on their ecosystem but also makes them privy to a wealth of data on how you and I use our money.
This data is an asset that can be used to reinforce their core offering, producing greater profit with more personalised experiences whilst protecting against any competitors without access.
For the time being then, the tech firms would rather leave the heavy lifting of banking services to banks whilst they concentrate on acquiring users and data with minimal regulatory risks via peripheral services such as payments. The question is how much further they are willing to foray into the sector?
The path of least resistance
For the banks, the entrance of big tech is an unwelcome one and there are a range of responses they can take in the face of their threat. Rebuilding their core banks to match new market demands is one option.
Another is building a complementary tech focused brand like HSBC’s Kinetic or purchasing a challenger bank such as Monzo to consolidate their position.
Partnerships are the least risky and most popular option in comparison, allowing banks to rely on their structural advantage of familiarity with back end services and regulation.
The price paid is ceding the front end to the big tech firms. The trend amongst banks so far have been to court a big tech bedfellow to take advantage of their user experience and marketing strengths.
This marriage of convenience is by no means guaranteed to continue. China has shown how quickly things could change.
China’s creeping convenience
In China it was e-commerce giant Alibaba that made the first move, establishing payment platform, Alipay, in 2004. Since then it has aggressively expanded its financial products and services forming Ant Financial.
Its success today is dizzying, Ant Financial’s market cap is greater than that of Goldman Sachs, and its Yu’e Bao money market fund is the largest in the world. It offers every financial service of a traditional bank including deposit accounts, credit and wealth management. This is not to mention its rival Tencent, whose Tenpay platform has even more active users than Alipay.
The aggressive moves from big tech in China have turned its consumer financial market into one of the most digitalised in the world.
Like the Silicon Valley firms, they chipped away at the banks with peripheral payment solutions akin to Apple, Facebook, and Google pay, and it’s easy to see how they could follow suit.
Chinese firms’ meteoric rise looks set to be stopped however. Beijing has begun to view the walled financial ecosystems setup by companies such as Ant Financial as monopolistic.
In 2020 new regulations were introduced to combat anti-competitive techniques including sharing consumer data, forcing exclusivity, and subsidizing services at below cost to eliminate rivals.
The new regulations introduced have given the banks some breathing space for them to rollback their losses. Regulators have hinted at penalties for tech firms that could range from fines, to unwinding mergers and acquisitions, to even breaking up industry leaders.
The effects are already being felt with the suspension of Ant’s $35 billion IPO last year, which would have been the largest in history.
The enemy of my enemy is my friend
It seems then that the regulators, an enemy of the banks merely a decade ago, could be their saving grace. Policy makers will be looking to address competition if the tech firms continue their horizontal expansion into finance.
They will also be paying close attention to data governance as concerns over data use worry both lawmakers and electorates. Finally, they may be looking to stop the blending of boundaries between tech and financial institutions should the former’s pattern of disruption threaten economic stability.
Moves have already begun to reign big tech in. In Europe, the European Union’s Second Payment Services Directive and Britain’s Open Banking initiative set their sights on banking data. Germany has amended its competition law to tighten supervision of big tech.
Across the pond in the US anti-trust sentiments look likely to manifest into real policy under the nascent Biden administration. US regulators have already sued Google and Facebook and are investigating Apple and Amazon.
For the time being, big tech will continue doing what it does best and disrupting the banking sector through digital innovation. Consolidation is by no means guaranteed though. Questions remain over the firms’ appetite to take on both the banks and regulators.
It is likely they will continue to creep into the industry via peripheries and partnerships until they have to face off with the banks and regulators like their contemporaries in China.
When the moment comes, we will see whether the banks take the fight into their own hands, join forces with regulators, or submit to Silicon Valley.