“People need the financial sector to be safe; people also need the financial sector to go through a massive phase of innovation. That means delivering on the positive rhetoric, like around settlement accounts, not allowing Open Banking to be diluted, and leading the way on AML.”
- Taavet Hinrikus, CEO and Co-Founder, Transferwise
The emergence of technology in virtually every aspect of our waking life has radically reshaped the way that we work, live and interact with our environment and other humans.
The sense within many industry commentators has been that until very recently the major finance houses have failed to truly engage with new technologies. Worries about potential risks or laxness due to the banks size and massive customer volume are both cited as reasons why.
The rise of Challenger banks over the last decade has put payed to any semblance that things can remain as they are. Unhindered by legacy tech, and powered by a zeal for customer service, banks such as Monzo, Starling and Revolut have begun to eat into the dominance once held by the incumbents.
One of the tenets that the Challengers have based their strategy on is using new technologies, utilising Open APIs, and mobile technology.
This has led some to propose the theory that there may be other companies that could express an interest in entering the UK banking market. Silicon Valley companies also have breathtaking levels of tech infrastructure, massive user bases, and almost unlimited capital.
There are many reports on the prospective entrance of the GAFA companies (Google, Apple, Facebook and Amazon) into the banking market.
In this article we will cover the latest events between BigTech, Banks, and Consumers:
Part 1 - GAFA (Google, Apple, Facebook, Amazon)
• Challenges for Big Tech
• Opportunities for Big Tech
• Digital Currencies
• The Chinese Experiment
Part 2 - Consumers & Banks
• The Consumer
• Banking Response
• Open Banking
Within the remit of this article, we will outline the challenges laid out before the tech companies, what their strategies are to dominate their industries, and where the opportunities for them lie.
In the second part we turn our attention to the banks. We will explore what their response could be should one of the tech firms enter the UK market. Finally, how will new developments such as Open Banking help to deliver the type of customer experience that will fend off any incursion from the tech firms?
Part 1 - GAFA
Challenges for Big Tech
Notwithstanding their accomplishments to date, their remains several intractable obstacles should the tech firms decide to enter the financial sector.
The most pronounced of these is the sheer volume of regulations that all banking providers must go through to offer their services. Scrutiny from regulators, led in the UK, by the FCA will be pronounced and sustained.
Should any of the contenders decide that they wished to become a full scale bank, the time, knowledge and experience it would require to hire the right people, put in place the right teams and experience in areas such as customer onboarding, AML and KYC, deposit funds, currency, and more would give high-street banks several years notice of what was to come.
High-street banks would likely receive years notice were any of the contenders vying to become a fully-fledged bank. This is because the time, knowledge and experience it would require to hire the right people, put in place the right teams would all be significant.
The regulations covering the activities of high-street banks are prodigious in their size and scope and satisfying their requirements is no mean feat.
The second challenge for the big tech firms is how to gain and keep the trust of consumers. As Chris Skinner highlighted recently, if a social media platform goes down for a few hours it is not a big issue. When consumers are unable to access their funds – even for a few hours – this is a severe headache.
Consumer trust is therefore the bedrock on which all banks rely.
This may in part explain why the GAFA firms are taking an incremental approach to finance. Releasing one new product at a time allows consumers the time and opportunity to buy-in to the thought of having an Apple logo on their credit cards.
Polls and surveys continue to show that, on the whole, consumers trust the high-street banks. This level of trust – while dented by 2008 and its aftermath – has been built up over decades of name recognition and banking experience. Should there be an outage with a financial institution run by one of the tech firms, would customers feel confident that it would be resolved?
Opportunities for Big Tech
Despite these challenges, the tech companies know that opportunity is abundant within the financial services markets.
A survey by Mulesoft found that 52% of the 8,000 young people between the ages of 18 and 34 would consider banking with one of the tech firms. A separate survey from Bain & Co suggested that 73% of Millennials would be more excited about a new offering from Amazon, Google, Paypal or Square than from their bank.
Banking and finance is a sector that moves notoriously slowly, which is anathema to firms like Facebook or Amazon. Their focus on relentless customer service leading to cross-selling and increased purchasing illustrates the marked difference in purpose.
One of the first conquests could well be within the payments industry. As we explored in a recent article, the sector is currently best described as being in a state of flux.
The opportunity for firms to disrupt the sector are rife, and the rewards appealing. Payments, particularly cross-border or cross currency are slow and expensive.
FinTech’s such as TransferWise, Zopa and Revolut are challenging convention around this, the industry has not yet settled upon one dominant player.
Moreover, the opportunity to bring into the fold millions, or even billions of unbanked individuals exists. Across Africa and Asia, it could yet be possible to have whole populations rely on a Facebook or Google for all their banking needs. In these regions access to banks is challenging, but mobile phones are ubiquitous.
We have already seen progress on this front. In the last month, a report from the New York Post suggests Amazon are designing payments using a "hand swipe" as ID.
Facebook has been the first and only of the tech companies to launch a digital coin offering. Project Libra could get the go-ahead for as early as 2020, assuming it gets the go ahead from regulators across the globe.
In their press offerings, Facebook have espoused the virtues of Libra and how it will support the unbanked and “transform the global economy”. Cynics note that it is Facebook looking to garner yet more data from users in an attempt to become the dominant technology in our everyday lives.
Response to Libra from the other players has to date been muted. They will likely seek to understand the riposte that Libra receives from regulators - at the time of writing this has not been unduly positive – and measure a response based on this. First mover advantage may bring some benefits for Facebook, but the regulatory headaches that could be forthcoming may also be substantial.
One opportunity for all of the tech companies is the possibility of entering new markets to sell more within their core platforms.
For Apple, for example, the possibility of working within financial services allows it additional scope for sales within the app store. The recent launch of the Apple credit card in conjunction with Goldman Sachs is a one example of this trend in action. The card offers cash back on purchases made within the app store, which also allows Apple to discreetly keep tabs on the users spending habits.
While I have up to now discussed the companies as one bloc, it is worth keeping in mind that each of the firms have very different plans when it comes to financial services, and how the opportunities within it present themselves.
If we take Apple, they believe that the way to retain customers and generate more revenue is by keeping customers on their platform. This can be seen in the formation of the app store from which Apple already derives vast profit. In 2018, research from Sensor Tower showed that users spent $46.6 billion on app store downloads.
The strategy can be also be seen in Apple’s credit card offering. With cashback on purchases and incentives for purchases within the app store, the intention is very much to keep pounds and pence within the Apple ecosystem.
The Verge reports that:
“Through its incentives, Apple is creating a system where you’ll shop in the real world at Apple Pay partners for an extra cash back bonus, switch your App Store credit card to an Apple one with an even better bonus, and rely only on the physical card for when you absolutely have to.”
This differs from Amazon, who have succeeded in building the brand to be the purveyor of all the world’s goods, defined by a relentless focus on customer service. Based on this, Amazon has its sights set on selling more, and particularly, on services that can benefit merchants.
To this end, it has already launched a plethora of financial products including Amazon Pay. Amazon Pay allows for customers to make payments on third party websites with their Amazon credentials.
A recent blog post from Leah Holzman, Head of Global Marketing Communications at Amazon, explains:
“Amazon Pay is a great example of customer obsessed thinking - extending the trust and simplicity of Amazon’s checkout experience to merchants – so they can get back doing what they do best: selling great products and services that delight customers. Today, Amazon Pay is providing a convenient shopping experience for thousands of third-party websites across the globe.”
At the same time, Amazon competes on a very different plane to banks. As described by an article in Banking Tech, traditional financial services are transactional in their relationship with their customers. Amazon is engaging, offering related products and services irrespective of brand, but tailored for each consumer. Using a long-term approach, Amazon take the term “lifetime value” to an different level by considering consumer needs at each stage of their life.
In turn, this differs from Google. Platform agnostic, Google can turn its hand to any part of the internet that it chooses, safe in the knowledge few search engines can, or possibly ever will, challenge its dominance in advertising and display.
To date, Google has shown little interest in building a consumer facing financial offering (beyond Google Pay), though it is widely known they have been supporting some banks behind the scenes. We are unlikely to see a bank of Google (or Alphabet), though Google may become the driving force for current institutions, offering them data and storage solutions.
This is supported by a recent quote from Google Executive Florence Diss, Head of Commerce Partnerships (EMEA), who said:
“We do a lot of heavy lifting behind the scenes because of course, most of the banks don’t necessarily see us as core so we’re doing a lot of unglamorous device gestation as there are hundreds of different devices that work with Android and making sure that they all work with one app isn’t something that our banking partners want to spend their resources on.”
The opportunities and strategies listed above are designed to help the respective companies to continue their unabated dominance in their markets. The opportunity to consolidate data collection on their customers and keeping money within the ecosystem through financial offerings are focused on driving new revenue streams and enhancing profit.
All three of the companies understand that consumer data is at the heart of their service offering.
Whether it be from understanding and controlling consumer buying impulses, such as Amazon do, using financial products to drive further sales and understand consumer sales as Apple do, or controlling how transactions are made as Facebook proposes with Libra, understanding and managing consumer data is pivotal to success.
The Chinese Experiment
The example of what has taken place in China is a pertinent one to refer to in this context. In China, financial services have become almost wholly dominated by QR Codes at the expense of physical cash.
Two tech firms have almost complete control over payments – Alibaba (through their offering Alipay), and TenCent (through WeChat).
This serves as a precedent for what could occur in the UK or other developed countries. The demise of physical cash in the UK is well documented. There are calls for cash to be safeguarded for those who rely upon it – the elderly and those in remoter parts of the country.
There is little doubt that the tech companies will have a clear watching brief on developments in Asia, to gauge public reaction to payments made through mobile and assess whether such a move will be feasible within western states.
The core differentiator between western states and events in China are, as we touched upon, the swathe of regulations and regulators who need appeasing. It is for this reason that a wholesale takeover of a particular market remains unlikely, and back office functions, data handling and matching customers to products is a more likely option.
The incumbent banks within Europe and the US are also far more dominant, both in their customer base and the reserves of money available to them than what was resent in China. This again, suggests that a more nuanced approach involving partnerships with established players is more likely to reap immediate dividends.
Part II - Consumers & Banks
Through much of this discussion, we have as yet, not spoken of the most critical grouping – individual consumers.
Should big tech firms wish to move into the financial services market, it will only be with the explicit consent of consumers who will buy their services.
Consumer surveys continue to show that banking customers are keen for further innovation within the sector, allowing them better access to their money and faster payments. This, predictably, is being driven by young people.
Lucie Greene, worldwide director of the Innovation Group, said:
“Consumers are adopting new behaviours en masse, including peer-to-peer payments, digital-first banks, cryptocurrencies and more. They expect more not only from bank brands’ services and ethics, but also from their curb appeal and branding.”
One of the key drivers that may tempt further developments within financial sector is banks and financial institutions have been very slow and cumbersome. Mainframes have been notoriously difficult to upgrade, and many banks have operated with patches or hacks for decades.
This has already, to a certain degree, been exploited by digital banks such as Monzo, Starling and N26, who have built banking systems based on simple lines of code and open APIs. For the technology firms who pride themselves on their pace of change, innovative mindsets, and ability to offer customers outstanding digital offerings, the temptation to develop a consumer facing product may be too great to resist.
For the consumer, greater competition, availability and offerings within the market should be a boon. Switching accounts has become simplified following the introduction of the Current Account Switch Service. A plethora of payment options have been introduced covering everything from Amazon Pay, through to Apple Pay to QR Codes should cater to every hankering.
We have spoken to some degree about the issue of the unbanked and financial inclusion, and this is another issue on which the big tech firms could move the needle should they chose to invest the resource.
In opposition to this is how the tech firms manage data. It would not be unfair to characterise this as currently being somewhat shoddy.
Apple and Amazon have apologised, only in the last few weeks, for their engineers listening in to private conversations from mobile phones and Alexa. Meanwhile the Facebook-Cambridge Analytica scandal and subsequent fall-out still lingers heavy in the air for many consumers. Google meanwhile has seen staff walk out in protest at their work with the US military and Chinese Government.
What reaction would the entrance of an Apple, Amazon, Facebook or Google as a direct competitor to the major banks be?
This question provokes a wide range of responses, and without looking too far through the looking glass, it is safe to say that the industry would change beyond all recognition.
The year 2019 has come late to many banks, who only now are developing “digital strategies” and enhanced mobile apps to keep pace with customer expectations. Cheques have largely died a death in western economies, though they remain common in the US.
In the UK, the high-street banks continue to hold incumbency advantage by holding a vast percentage of current account, mortgages and loans. The rise of the Challenger banks, and the market share that they continue to eat into, has provoked a response with more tailored customer offerings.
The banks could force through some M&A activity, further consolidating, cutting expenditure and creating one or two super-sized banks.
While this would bring about the creation of an entity or entities with extensive market share, customer base and cash reserves, this would also be viewed as an ultimately defensive position, with no guarantee that new competitors could be fended off.
As a further option, the banks could look to seek partnerships with the tech companies, accepting that they hold distinct advantages in some areas such as customer engagement and use of data.
This seems the most straightforward and “win-win” theory for all concerned, offering the best of both worlds to both parties.
Finally, a retreat in their respective positions is also a possibility. Offering the tech firms the ability to provide services such that they became the underwriter of services, would again be defensive, a retreat from the current position, with no guarantee of success.
The stability of the banking sector is also crucial to consumer confidence and the markets. As we saw in the wake of the 2008 Great Financial Crash, Governments do their utmost to maintain trust within financial markets and keep an even keel.
When we consider the role of Government, and regulators such as the FCA and CMA, a retreat by the banks to a back-office function or mergers looks wholly unlikely.
This narrows the possibilities to taking the threat head-on and developing the products and services desired by customers. They must also find the right strategies to delight customers at every interaction.
Could it now be that a government initiative is forcing the hands of banks to begin offering some of the very products that will transform how consumers view financial products?
Introduced last year, Open Banking has steadily begun to take off in the UK. Open Banking was designed to help bring new and advanced products to market that can benefit the lives of both consumers and financial services companies.
At this time, consumer use of Open Banking has been limited, with account aggregation the most readily identifiable feature. There are, however, a host of FinTech companies, as well as the banks themselves, who are working on designing and launching applications that will change our relationship with money.
New applications using Open Banking are already being introduced in savings, investments, mortgages and pensions. Companies such as DirectID change the way that banks consider their relationship with the consumer – offering a far greater suite of information based on real-world facts rather than the hunch of a credit score.
One of the ironies of Open Banking is that while it was viewed with scepticism by the finance houses, it could prove to be the catalyst required to develop services that will keep the tech firms at bay.
Open APIs give the consumer far more control over their data and will make switching between products and services far easier. Eventually we will see robo-advisors who will move money from one account to another to cover a bill, or apply for a short-term loan, even for just a few hours, to cover an unexpected request.
This will aid us in paying the minimum for our services, and therefore demands that customer experience and service quality becomes the benchmark against which banks are judged. Improving this is imperative for holding off the tech companies should they begin to encroach.
Beyond what Open Banking can do for consumers, the banks can feel the benefits of Open Banking, such as through the use of a tool such as DirectID Insights.
DirectID Insights helps underwriters and fraud analysts to make better and faster lending decisions using Open Banking. By doing so, customers bank data can be pulled into reports allowing lending decisions to be made in minutes. This bypasses the current need to send in bank statements and have an underwriter sit for hours analysing customer spend and expense.
DirectID Insights also offers solutions such as Income Verification and Bank Account Validation, cutting down on fraud and resultant loss, and provides a much sharper customer experience.
There are currently a host of FinTech's and banks, who are working in the field of Open Banking, bringing the sector right up to date for current times. As their services become more commonplace within the banking sector, the industry will not only be able to cut costs, improve customer service and augment activity such as AML and KYC checking, but the technology will allow it to compete effectively with the tech companies, should they enter the sector.
As we established as early as the opening quote, the banking sector is in a state of flux with new technologies emerging, customers more readily willing to move and new competition watching from the shadows.
Every move made by the GAFA firms is being watched and scrutinised by high-street banks, trying to second guess what their intentions may be.
This goes even beyond the banks. Regulators, both national and international seem to have been caught short by the announcement of Libra by Facebook, admitting both privately and publicly that they are unsure of what their next move is in trying to regulate such an entity.
The intentions of the big tech firms have to date been kept relatively quiet – some estimates put their involvement in financial services at around 10% of annual turnover.
That is not to say that they do not have an interest in the sector, only that they have so far only dipped their toes in the water. Far more likely that they are keeping their powder dry for an opportunity deemed too good to turn down.
The challenges in entering the market are however significant. As many commentators rightly note, the volume of regulations that those within the sector are subject to, is on a far higher plane to anything that a technology firm faces. Regulators both national and international will also be extremely wary of granting banking licenses to companies that have history of undermining or exposing customer’s data.
The response of the banks could well be the determinant factor in whether the tech firms decide to make a direct move. They are all too wary of quotes such as that given by the CEO of now defunct Blockbuster that “Netflix.. are not even on their radar”. While some have embarked on making their offerings more customer-centric and digital focused, more work is required.
The more likely impetus for the banks to reform and upgrade, is the rise of the potent Challenger banks. The Challengers are routinely now coming out on top of surveys for customer service and having the best mobile apps, and this, allied with their consumer offerings are causing them to eat into the incumbent's customer base. While most have yet to turn a profit, their status, particularly amongst younger customers, will see them continue to grow and consolidate into the future.