How Big Tech threatens banking

Written By Graham Seel

Big Tech firms have made it clear that they don’t want to be banks. Well of course they don’t. They don’t want the massive infrastructure costs, oppressive regulation, and traditional banking ideas that are limiting the development of modern banking. What they do want is banking customers and their data, easy revenues from basic digital banking services, and integration to their own core services that will increase customer loyalty.

With the real possibility of a full range of digital banking services, centered on mobile phones, Big Tech firms can do a wide range of things that traditional banks find very difficult to do cost-effectively. Digital-only banks have had relatively limited success so far, partly because they have to build market reach incrementally, even when they are sponsored by a well-known commercial bank. Big Tech companies, like Google, Facebook, Amazon, Apple and Ant Group, have massive ready-made customer bases – both consumers and businesses – who are ripe for the digital finance picking.

How Big Tech is Moving into Financial Services

In case you thought that, apart from basic P2P payments, Big Tech wasn’t yet really invading the banking space, here’s a quick survey of what they are doing as of today:

  • Google is introducing consumer bank accounts through Google Pay, and adding insights and budgeting tools. They will avoid being regulated, by having the actual banking work done by one of a number of banks and credit unions, including Citi, BBVA and BMO.  Project “Cache” is expected to start enrolling customers in 2021. Google will co-brand these accounts, so that the banks won’t lose their visibility. But Google still has plenty to gain.

  • Apple has struggled somewhat with its credit card relationship with Goldman Sachs, but clearly shows intent to deepen its customer relationships beyond the basics of Apple Pay.

  • Facebook introduced its own digital currency, called Libra, although this is a much more heavily regulated play, and in fact under massive publicity and regulatory scrutiny many large partners have dropped out. Not quite so well publicized is the digital wallet Calibra (recently rebranded as Novi) that will presumably be introduced independent of a digital currency.

Crossing over from the consumer world into business, are perhaps the two biggest threats of all:

  • Ant Group (previously Ant Financial, the owner of Alipay), is majority owned by Jack Ma, with a large investment also from Alibaba. As a CNBC report puts it: “Ant Group has been expanding its reach into everything from wealth management to micro-loans. And beyond that, it has been focusing on selling financial technology products to enterprise customers.” Ant Group also offers business loans and insurance. But they’re not a bank. At least Chinese regulators, and regulators of the other countries they are entering, don’t see them as a bank. Why? Because they don’t take deposits.

    • While Ant Group’s presence in the US is primarily targeted at the Chinese diaspora, there is every reason to think they’ll look at the US market more broadly in the future. This is reinforced by their recent announcement of a planned IPO, targeting a valuation of $225 billion (per Bloomberg, Aug 20th 2020). In the shorter term, it is likely that Ant Group will seek to expand outside China into fast growing developing world regions, particularly Africa & India.

  • Amazon doesn’t take deposits either. Of course not – except in India. Its Cashload feature allows them to take up to an extra INR 10,000 ($143) per month when customers pay Cash On Delivery for products. This money is “warehoused” in a mobile wallet and available to buy any services on Amazon or its partners. Add this to credit cards and business loans, and looking at Amazon’s place in the supply chain, really opens up possibilities especially for additional business banking products.

Banking as a Service and API Banking

A development that makes Big Tech (and in fact almost any) companies a bigger threat to banks is the advent of Banking as a Service (BaaS). At the moment this is a slight misnomer, since it is a select set of services that is being offered. However, in principle BaaS provides API-driven banking services that can be offered by a retailer, wholesaler, or any company that has the potential for financial interactions.

The BaaS provider takes care of all the back office processing, and offers flexible and functional APIs that allow the addition of payments, loan applications, even deposits to a would-be FinTech. 

There are two major categories of BaaS provider. The first are highly tech-savvy banks such as BBVA, and smaller special-purpose or digital-only banks, such as Starling Bank and California-based Green Dot. 

Pure technology companies, that do not themselves have banking licenses, are still able to offer a wide range of services, especially in the payments space. Examples of these are European companies solarisBank, Bankable, and Railsbank that are eyeing the US market, with Railsbank having just announced its first US customer. In the US, Q2 offers back office processing as a service to banks as well as Fintechs and other companies.

An exploration of the potential impact of BaaS and Open API creating an “inflection point in US banking'' was recently published by David Milligan and covers the strategic implications in more detail.


What Should Banks Do?

The challenge facing banks is that Big Tech firms can offer financial services at a fraction of the costs facing banks, especially with the availability of BaaS, making them far more profitable. In fact, since Big Tech ROE is typically much higher than that of banks, they wouldn’t bother if it wasn’t for their much bigger margins. (They actually often claim that they’re really not in it for profit at all, but just for access to customer data, which of course they use very carefully and safely. You be the judge!)

So if banks were to go through a complete digitization of their processes (perhaps through a ground-up digital arm using all available technologies), they too could potentially match Big Tech cost structures for non-depositary services. There is no reason at all why banks can’t compete successfully against Big Tech, but only if they go through a radical digital transformation. Banks still have expertise, trust, long-term stability, and deep access to financial markets as advantages. They also have extensive relationships with all customer segments” corporate, middle market, small business and consumers. 

Combining digital technologies, banking advantages, and strong deposit and credit relationships, should allow banks to offer a range of digital products that respond to younger generations’ expectations, and to meet older generations’ needs, cost-effectively and profitably. 

Perhaps it will even make sense to partner with Big Tech. But only on the bank’s terms.

Graham Seel
Previous

The Next Waves in US Banking - Part 1: Partner Banks Rising
Next

Banking in the USA at an inflection point