The announcement that Facebook was entering the world of cryptocurrency through the launch of Libra has certainly sent shockwaves through the tech sphere, with its future as the “global currency” hotly debated.
Until recently, the biggest threat to traditional banking appeared to come from fintech firms, with innovative banking products and challenger banks already making their mark on the industry. However, disruption may also come from another source: Big Tech.
Having already made their mark on countless industries, Google, Amazon, Facebook and Apple may now have their sights on the banking industry. A recent survey of 18 to 35 year olds conducted by MuleSoft said that 52% those people in the millennial bracket would consider using banking products from one of the GAFA (Google, Amazon, Facebook and Apple) companies.
With this in mind, Freddy Kelly, co-founder and CEO of credit bureau Credit Kudos believes that there is a threat of Big Tech “coming in and eating the lunches of the banks and fintechs”.
Big tech and big money
Speaking at Fintech Week 2019, Kelly believes that the next few years could see GAFA companies having a significant impact on payments, lending, current accounts and insurance.
Big tech companies have already begun to embark on financial ventures, with payment platforms such as Google’s Google Wallet and Google payments, Amazon lending to SME marketplace sellers, Facebook’s partnership with Clear Bank on a product called Charged, a programme that allows financing for advertising, and Apple’s credit card, launched last year with Goldman Sachs and Marcus in the US.
However, no Big Tech company has been able to offer a complete financial ecosystem, with “taking deposits and providing current accounts” currently facing regulatory hurdles. But this may be about to change as Big Tech looks to further expand its operations.
Last year, the Wall Street Journal reported that Amazon was in talks with J.P. Morgan Chase to offer checking accounts. Bloomberg also reported that Google had been granted an eMoney license in Lithuania.
In China, Big Tech’s encroachment on banking is already apparent, with Tencent launching WeBank back in 2015, and last year launching its own credit scoring system. With the enticing opportunity of gaining even more insight into users’ lives through their financial behaviors, the impact of Silicon Valley looks likely to play a key part in the future of banking.
The data advantage
Big tech is in the position of having a significant “data advantage” over banks or fintechs, with the ability to glean more information about their users than others could hope to achieve. With the tech resources to offer an improved user experience and services that are integrated into their existing platforms, a grasp of artificial intelligence that traditional banks are only just beginning to deploy, sophisticated cloud computing, and an already loyal user base, up to 40% of the revenue currently generated by the US financial industry could move over to Big Tech, according to McKinsey.
Financial services disruption and innovation lead at PWC Arthur Hughes-Hallett believes that the ability to have an insight into both sides of a transaction will give the likes of Amazon and Google a unique competitive advantage over traditional financial incumbents:
“In terms of who’s going to disrupt the market further, I think we’re seeing it already with launching their credit card with Goldman Sachs…I see certainly Big Tech being a winner due to data. That idea of completing the circle, the idea that you can see both sides of a transaction, it’s never happened in history. It’s an amazing ability as you can see both how much people have in their bank account and what they’re spending it on. If you’re Amazon and you have that, how do others compete with that?”
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Earlier this year, the Financial Stability Board, the international body responsible for monitoring the global financial system, published a report on the impact of fintech on financial stability, and highlighted that Big Tech may in fact have more of a competitive impact on incumbent financial institutions.
Kelly believes that the realms of data at their disposal means that Big Tech companies are in the position to offer highly personalised financial services and “contextual lending”:
“If they have this true, continual view of a customer through their data, through their day-to-day banking, so that they can understand the financial needs in the context of a lending decision, perhaps before that customer has even realised that they need credit, they can implement credit policy around that, and that gives them the ability to be most competitive.
“If I can understand through the data and the consent process from my individual user over time, what they’re going to need before they need it, then it’s a huge advertising and marketing advantage for some of these Big Tech companies. This is gold for them. How can I anticipate that need using more data and then how can I monetise that information whether it be me as a as a bank or as a broker or whatever mechanism I choose.”
However, given the track record of social media giants and user privacy, especially in the aftermath of the Cambridge Analytica scandal, Big Tech has a long way to go before users are willing to entrust them with their sensitive financial information:
“There’s this weird disparity of trust when it comes to consumers. People trust their doctor who keeps their medical records in a filing cabinet but don’t trust Facebook to keep them encrypted, who have a far more broad ranging information security policy. So the question is, again, why would I share my data with a big tech company? What experiences might they give me?”
The World Economic Forum has also highlighted that companies having access to both financial and non-financial information on users “would raise serious questions about how best to avoid both anti-competitive behaviour and the inappropriate use of personal data”.
When asked if he would be willing to give a company such as Amazon access to his banking transactions, Hughes-Hallett expressed that he would “personally not be comfortable” with the concept.
There is also the matter of regulation. According to the BIS, the presence of big tech in the financial services market, either independently or in partnership with banks, raises “a host of questions around competition, financial inclusion, data protection and financial stability”.
However, open banking regulation, or PSD2, means that in the EU, banks are now required to share information on customers’ finances (with their permission) with third parties. This could mean that in the future finances could be integrated into other services without the need for Big Tech companies to acquire banking licenses. In this context, banks are therefore under increasing pressure to innovate and step up their digital products:
“You could argue one of the ways that they might greatly improve this experience in this context is by using banking API’s to aggregate all of the data that an individual has. So if I could load in my Monzo account into this view of my spending and get it rewards in return that for another one that talked about a lot of payments.”
“No big tech organisation is getting excited about being a bank”
Although they may pose a threat to traditional banking, this is just part of the picture for Big Tech. Kelly believes that by entering the financial sphere, big tech companies are not looking to become banks themselves, but rather as a means of gathering even more data, and further positioning themselves at the centre of users’ everyday lives:
“A central question [for Big Tech] is how do we get more data, and therefore get more context and therefore be more relevant to our customers? And I think that’s the continual message. And banking is perhaps just one way that they achieve that. But it isn’t really the end goal. I think no big tech organisation is getting excited about being a bank, but they are getting excited about serving their customers, and being more central to their financial world and their general day to day transactions, whether that be payments or whether just be using their services.”