PayPal co-founder Peter Thiel, writes in his top-selling book Zero to One, "there is no reason technology should be limited to computers." While this sounds like a simple, reasonable statement, what does this ‘technology takes all’ attitude mean for banking? It’s no secret that banking is one of the industries being eyed off by the tech giants. In fact, research shows that almost one-third of people worldwide would bank with Google, Apple, Amazon, or Facebook.
But should Australia’s big four banks be worried about the big four tech companies encroaching on their turf? Let’s take a closer look at how these non-traditional finance players are shaking up the industry…
Paying attention to the competition: fintech or big tech?
Traditional banks afraid of losing market share to smaller players have been focussing much of their attention on the threat posed by fintech companies. However, a recent report by the World Economic Forum suggests that the future belongs to the platforms that offer the ability to engage with different financial institutions from a single channel. It predicts that this will eventually become the dominant model for the delivery of financial services. This indicates that Australia’s banks should focus their attention on established tech behemoths rather than smaller fintech players. The big four tech companies (Google, Amazon, Apple and Facebook) have poured money into areas such as artificial intelligence, big data customer analytics and cloud computing, which are the keys to this flexible, personalised, single channel banking model.
Partners or competitors?
So how can incumbents respond? One option is to emulate the core capabilities of the large tech firms, but this can lead to an increased reliance on those same firms. According to the World Economic Forum’s report, big companies including Aon and Carlyle are among the customers using Amazon's cloud computing platform, for example, while the tech giant's voice-activated system Alexa is used by Capital One and Liberty Mutual. There is no denying that these are productive and mutually beneficial partnerships, but are they partnerships between equals? If tech companies decide to go into direct competition with banks, the partnership paradigm quickly evaporates.
What are big tech companies already doing in the banking space?
Is this just speculative fiction and fear-mongering or are ‘Banks of Tech’ already offering banking services? Let’s take a look at a few examples:
- Brazil's Banco Bradesco lets customers conduct day-to-day banking through Facebook.
- The Central Bank of Ireland has added Facebook as a company to its roster of digital payment providers.
- Facebook enables users to send money to each other in its Messenger app, and reportedly will soon add remittances to businesses.
- Chinese e-commerce giant Alibaba’s digital payments arm Ant Financial quietly applied for an e-money licence in the United Kingdom in its drive to expand internationally. The $60bn company already has more than 500 million users and processes about 250 million transactions a day.
- Amazon’s payment service allows online vendors to take payments across the United States and Europe, and also makes small loans to merchants in the United States, United Kingdom and Japan through its B2B arm, Amazon Lending. The division has made loans totaling over $1.5 billion, with a total outstanding loan balance of $400 million.
- Samsung and Apple offer payment and wallet services tied to their mobile devices.
Replacement of banks or just disruption?
These examples and market research suggest disruption of traditional banking services. What they don’t show is one or more of the big tech firms offering full banking services such as:
- Carrying cash
- Processing cheques
- Offering mortgages
- Providing comparisons of financial products
It’s more likely, instead, that banks may lose the direct interface with customers, rather than losing their accounts. This could one day lead to banks becoming a ‘no name’ product provider; a ‘dumb pipe’, with the big tech firms providing the brand.
Although the big tech companies may have not yet materially changed the competitive landscape, they will undoubtedly play a critical role in defining the future direction of the banking and financial services sector. To find out more about how banking technology is changing the industry, download our latest white paper.