All eyes on BigTechs
At the start of the year, Accenture predicted that 2019 would be the year that BigTech players make some definitive moves in banking, and that the line between BigTech and banking would continue to blur.
Prior to 2019, the four western BigTech companies, or ‘GAFA’ (Google, Amazon, Facebook and Apple), had already started making moves into banking and payments. Google and Apple both had their own payment functions and wallets, Amazon had started lending to SME marketplace sellers and rumours spread of them potentially white-labelling JP Morgan Chase current accounts in the US. In the East, Asia’s ‘BAT’ (Baidu, Alibaba and Tencent) had also made serious headway into financial services, for example Tencent’s ‘WeBank’ and ‘WeChat Pay’ and Alibaba Group’s ‘Alipay’.
It is safe to say that incumbent banks are beginning to feel threatened by BigTech’s presence in financial services. The fear is that banks become invisible lenders, with loans being intermediated by BigTechs. This would mean banks become disintermediated from their customers and commoditized.
Heaps of data, and the skills to match
Having built their business on modern technologies and through following a data-centric approach, tech giants already have a clear advantage over most banks. Because of this, many are already deploying, or have an easier route to deploying artificial intelligence technologies. This is necessary in order to decipher the vast quantities of data that they collect on their customers. Of course, different BigTech companies use this data in different ways; Facebook and Google use it for targeted advertising and others, like Netflix, Uber or Amazon, also use it to improve products and services.
GAFA and BAT all have powerful brands and huge loyal customer bases that they have been dealing with and gathering useful data on for years. Using this data, they have the potential to offer highly personalised financial services. Successfully offering financial services to their customers will only further increase the knowledge they hold on their clients – who they are, their spending power and what they regularly spend money on. This is arguably the aim of the new Apple Credit Card. It attracts customers with the titanium card and instant cashback (but offers little else new) while gathering data about how its users are spending their money. Apple has the profits to suffer losses on this particular venture, for a little while at least, while it taps into the valuable customer data.
Levelling the playing field
The danger here, is that because BigTechs are not regulated in the same way as banks, they could potentially generate profits through actions such as adjusting prices depending on the customer. For example, a customer with a penchant for spending could be targeted with higher prices and luxury brands.
Earlier this year, the Bank for International Settlements (BIS) released a reporton BigTech in banking, and one of the key takeaways was that regulators have to ensure a level playing field between BigTechs and banks. It argues for the principle of “same activity, same regulation” – essentially that activities by BigTechs that mirror the activities of banks should be subject to the same regulations.
It’s important to note, however, that while many BigTechs are offering specific financial services, such as Amazon Lending, they are not currently incentivized to provide end-to-end banking services as they want to avoid bank regulation. Consequently, many have been shying away from fully-licensed banking and are disrupting financial services in more specific areas.
One of the potential upsides of BigTechs offering financial services is the enhancement of financial inclusion. BigTechs could bank the unbanked or underbanked and make a positive difference to global economies. This is one of the promises of Libra, according to Facebook, as it gives financial access to anyone using the Facebook platform even if they do not have a bank account. However, certain barriers still remain: the user needs a way to access Facebook on a computer or a smartphone, and they still need money to exchange for the cryptocurrency.
The remaining question is this: in the aftermath of the Cambridge Analytica scandal, if BigTechs do start offering the same services as banks, will consumers trust them with such sensitive data? While banks have traditionally scored highly in terms of customer trust, it seems that younger generations of customers are increasingly willing to give GAFA a shot. According to research by Novotas, 68% of Millennials and 65% of Gen Z would consider banking with a BigTech company like Amazon. With tech and data advantages, and growing consumer trust, BigTechs increasingly seem to have an upper hand. How can banks compete? If they haven’t already, they will certainly need to start taking a leaf out of GAFA’s book– adopting digital, customer-first experiences built on data – or face the very real, and immediate threat of BigTechs.