Incumbent banks collaborating with Big Tech companies are striking a difficult balance between partnership and competition. Now unless you were living under a rock, 2019 was the year that the vast majority of media outlets would have you believe that all the tech companies were becoming “banks” right!? Ermmm, not quite.
The encroachment of the Big Techs onto banking turf may initially seem to be a threat, but what we’re witnessing is incumbents embracing collaborative opportunities. I explore some of the reasons behind this in the first part of this article.
In doing so, banks are utilising the greatest strengths of their would-be competitors – their distribution networks – and are achieving an upper hand on the competition, with Big Tech players offering white labelled financial services to their customer base.
Delivering to the consumer
Big Techs have realised, with the commoditisation of core components such as Payments, that they need to partner with the banks to get access to the richness of underlying data they desire. They are therefore moving away from concentrating on purely enterprise infrastructure solutions, and turning their focus into offering propositions to consumers. This is facilitated by the wealth of personal data they hold on individuals – a huge asset, but a continuing concern when it comes to matters of privacy and security.
The Big Tech titans are hoarding and hiding personal data at levels that are orders of magnitude above what the banks have been doing for centuries. This raises questions around the true ownership of personal data. Even in the wake of the Cambridge Analytica scandal, Facebook in particular is able to create dominant network effects and build a protective moat around its empire to stop would-be competitors eating away at its market share, or even just entering the market.
Clearly, through the introduction of legislation such as the Payment Services Directive (e.g. PSD II most recently) and the UK’s own take on this with Open Banking, Brussels has stepped in to ensure individuals can decide about how their data is used. The question then arises around how much further they should go with the inclusion of Big Tech within this realm.
An arms race
The battle is now about who owns the end to end customer experience and journey. What we’re really witnessing is an arms race between the Incumbent Banks to tie up partnerships with Big Tech players.
Case in point, Google offers checking accounts to consumers (via Citi), Apple launches credit cards (via Goldman Sachs), Amazon announces it’ll be offering banking services (via JP Morgan). All of these plays in my view are attempts to create Trojan horses to absorb as much customer data as they can get their hands on.
The core strengths of Big Tech can then play out. Their capabilities around Machine Learning will see the industry move from simply Systems of Record and Systems of Engagement, towards something far more powerful.
They’ll create Systems of Intelligence, able to pull together the proliferation of public and private APIs from across all industries (not just Financial Services). These will sit on top of multiple data sets to actually start creating autonomous agents able to carry out tasks on a mass, personalised basis. With that capability, organisations will be able to to start putting the ‘Service’ back into Financial Services.
Choosing to partner
What’s more, the interesting thing when looking at GAFA is the benefits they would reap from creating the core range of financial products themselves. This would allow for a higher margin and for the business to be vertically integrated (they make some or all of the financial products they sell, therefore they can capture all the profit.) But they’re not. They’re choosing to partner instead.
In doing so they’re sticking to their roots in remaining innovative as they grow, by clearly understanding which decisions are reversible and should be executed quickly (they’ve talked about this move into financial services for over a decade after all), and which have lasting consequences and should therefore be mulled over more slowly.
They’re also limiting regulatory scrutiny and ensuring their capital isn’t tied up in various financial products so that they can continue to deploy technological innovation and battle it out through their channels of distribution for market share.
When you take a closer look, the relationship between the banks and the Big Tech companies appears to be a marriage of convenience, with each party having its own role to play. The Big Techs are focusing on creating frictionless customer experiences, acting as the front end for the incumbent banks, and marketing financial services to their billions of users.
When it comes to the back end and core banking piece, on the other hand, they are leaving it to others. For the incumbents, this represents a poisoned chalice, as they know that their Net Interest Margin and the profitability of their most lucrative products will continue to be squeezed by the introduction of Big Tech to the field of play.
Managing the red tape
All that being said, creating partnerships between large behemoths – incumbent banks and Big Tech titans – is a procurement and risk minefield. This is why I believe that the players that will get ahead are those that are able to streamline the onboarding process for integrating third party partnerships, whilst also creating sandbox environments for the Fintechs and Big Tech players alike to safely test their newly found capabilities or propositions before taking them to market.
This also re-affirms another belief as we move forward – the ease and speed at which startups can launch and operate will leave a door open for them to collaborate with both of these institutions, as opposed to being totally pushed out of the scene.
Facebook goes it alone
The one Big Tech player which does seem to be taking a different route altogether is Facebook, which launched its own Stablecoin initiative, Libra. However, the global outcry at its attempts to sideline Central Banks and Government bodies with this plan has seemingly put the brakes on it for now.
Could the recent announcement of ‘Facebook Pay’, allowing you to send money over Facebook, Instagram and WhatsApp, be in fact be an almighty pivot to the Libra debacle to stay relevant in this space? We wait to see.
A matter of trust
Putting all that aside, the Big Tech and banking bromance is not secured by any stretch of the imagination. Yes, billions of people continue to supply personal data to the Big Tech players on a daily basis. Yet with the relentless wave of issues around disinformation, privacy breaches and political extremism – leading to changes, multi-billion dollar fines and new privacy laws – it’s debatable how open consumers will be to switching their paycheque from an established bank to a Big Tech player.
Trust remains a key concern across the board. Something that Digital Banks are still finding ‘challenging’ – despite the incredible growth of Daily Active Users – is securing the deposit of pay cheques by these users into their accounts. This would turn them into the primary accounts of their customers, and in doing so, achieve the Digital Bank’s ‘North Star’ – becoming the hub for all the financial interactions of their customers.
The other consideration is around how policymakers will view the latest developments in Big Tech partnering more deeply with the banks. No doubt they’ll need to scrutinise the ambitions they have for this space, as well as gain a much deeper understanding formulated around the financial stability of the partnerships outlined and the data governance put in place. Most importantly, they will also have to consider competitive policy making.
What we need is for policymakers, not just in the UK but globally, to start formulating a clear blueprint of how they will support the fine balancing act of collaboration and innovation within the industry. This, whilst at the same time remaining cognisant of the need to support consumers – with the absolute necessity of data security, privacy and a clear understanding of the boundaries of data surveillance of the Big Tech players.
Security supports innovation
This is a key component for the industry in unlocking the next wave of innovation for consumers and small business owners, and will no doubt be a key focus point for the FCA in the UK and ASIC in Australia, with the Global Financial Innovation Network (GFIN) now in place.
Big Tech might be offering out services for free, but the question is – at what ultimate price, and does that support their engagement with monopolistic behaviour? If their business model of partnering with the Banks ends up being anti-competitive then we need to take action to change this.
I genuinely believe competition makes everything better, whilst delivering the best experience, results and innovation for all customers. What needs to be more closely managed is a move to ensure we don’t just transition from one concentrated pool of providers in the CMA9 to another in GAFA in the West.