Beware, Big Tech is here to eat your lunch. That is today’s equivalent for the financial services industry of the great communist threat during the Cold War. What’s behind “Big Tech” then? Usually, we mean FAMGA: Facebook, Apple, Microsoft, Google and Amazon. Some people instead look at FAANG: Facebook, Apple, Amazon, Netflix and Google. Or even GAFA, excluding the much smaller of the group, Netflix. But FAMGA makes more sense because it represents the five largest stocks in the Nasdaq-100 with c.40% of the index of the 100 largest Nasdaq companies. Hence, the Big in Big Tech. They are steadily more active in fintech through patent approvals, partnerships, and investment activity. Their eastern cousins, the BAT (Baidu, Alibaba, Tencent) have been active in financial services for years and are considered pioneers in most aspect. Let’s see… Big Tech in Financial Services: should banks and fintechs be worried?
What is also slightly misleading is that we put all these tech companies in the same basket. Because they are ‘tech companies’. But clearly, they are all different beasts. The FAMGA compete with each other in certain market verticals. Amazon Web Services with Microsoft Azure. Apple’s iOS with Google’s Android. However, they mostly do not compete directly as a whole company. It’s a bit like they have each carved a big market and remain unchallenged. Like Facebook with social media. Or Google (more like Alphabet) with its search engine. They know where they are good and do not challenge too much other tech companies. Quite logically, they each have therefore different strategies for financial services. Because they all have very different core businesses.
The social media giant made quite a splash when it announced its cryptocurrency, Libra, in 2019. It was a very ambitious project launched in fanfare. The project’s main goals was to boost financial inclusion by targeting the 1.7 billion unbanked adults globally. It would be a stablecoin, a cryptocurrency backed by a basket of currencies. There were a number of corporate backers at launch including PayPal, Stripe, and MasterCard. It was all nice and good. A very noble project it seemed, that could be scaled quickly to its huge user base.
But it clearly not went as planned, regulators did not like it. At all. They said that no consultations had taken place. Which is something regulators tend to hate, that you don’t talk to them. And they did not like the possible effects on financial stability if Facebook were to print its own money. Soon enough, the corporate backers jumped off the ship. And now a revamped version, much less ambitious, is being planned. Does it mean the end of Facebook in financial services? Not really, they have created a new team called Facebook Financial to look after their fintech ventures, which are focused on payments and digital currencies. Watch this space.
Apple has for quite some years developed Apple Pay. Building on the millions of Apple products’ fans to get them to use their phones as a mobile payment tool. That was quite a smart move, and the beginning of Apple tip-toeing into financial services. It really took off as the world is transitioning to cashless payments. And they obviously have launched the Apple Card, a credit card in partnership with Goldman Sachs’ Marcus. It has been quite successful thus far.
What next? Apple just acquired Canada-based mobile payments company Mobeewave. So it seems that mobile payments is something they want to expand on. The Apple Card seems to be doing fine, and is part of a broader strategy to diversify from the iPhone. Apple wants to become a more diversified business, and financial services are part of it.
Microsoft is taking a different approach. The older tech giant of the group is rather interested in powering banks and fintechs tech infrastructure. Staying in its environment and doing what it does best. Of all of these Big Tech talk in financial services, Microsoft seems the less interested in being confrontational with the banks and fintechs. The guys in Seattle are more interested in powering financial services through Azure and other tools than competing for share of customer wallet. For instance through their partnership with fintech platform Finastra.
It could be a smart move, at a time when anti-trust officials are worried about competition in certain sectors. For instance, they already do not like that Amazon pushes its own products alongside sellers on its marketplace. What about its own financial services hosted on AWS competing with AWS-hosted neobanks? It might have to choose somewhere down the line, but Microsoft has chosen its path already….
Similar to Apple, Alphabet (Google) has been significantly building up Google Pay over the years. And the move to cashless also helped. But it is not the first time that the tech giant was venturing into financial services. It has been experimenting for years from insurance and mortgage comparison to partnering with peer-to-peer lender LendingClub back in 2015.
The biggest signal of Google’s interest for financial services was the revamp of Google Pay announced a few months ago. It went from mobile payments to wanting to be a personal banking hub. Google Pay will now provide current/checking accounts in partnerships with several banks. Initially in the US, the ambition is global. Google sent a clear signal: we are not just interested in being a mobile wallet. We want more!
With Jeff Bezos semi-retiring from Amazon after 27 years at the helm, one can wonder if there will be a change in strategy. That’s unlikely. Amazon has dabbed in financial services for years. And is unlikely to materially change. If anything, it might go further into banking.
If you need to pick one name for Big Tech in financial services, think of Amazon. They are further along than most tech companies. It goes from payments to lending, including insurance and digital wallets. Amazon’s tentacles are everywhere, and it would not be farfetched to call it a fintech company. CB Insights pulled together a very comprehensive report on what Amazon is doing in financial services. It does not look like the “books’ merchant” is going to step away any time soon…
So what is this Big Tech in Financial Services threat all about?
We have the tendency to put all these tech players in the same bucket. But they are widely different businesses. Therefore, their approach to financial services is clearly disparate. It’s not all grim for banks. The Big Tech guys are not trying to displace or replace them. Mirroring their asset-light and typically high profitability businesses, they are interested in the juicy parts. Being the front end, the origination engine. An operating model that feel like an SaaS model is more what they like. Managing a balance sheet with paltry margins? No, thank you…
Per se, it is therefore not an existential threat. It will be for some. Being relegated to the role of a utility like an electricity company means larger banks will prevail. Smaller ones will struggle or be absorbed. Acting as the balance sheet to technology companies that effectively own the customer relationship in a digitally efficient way. That’s the Big Tech dream.
All that being said, what does it mean? Well, you will have guessed that this is more of a threat to fintechs. You know, the guys that have built their reputation on slick user experience. And cool apps. All-in-all, mastering the tech world. But who is better at Tech than the Big Tech? It is not all bad news though. Because it will force some fintech companies to go beyond that. Beyond just the nice customer interface. And really reinvent financial services by thinking about finance before tech.
Competition is a good thing. Obviously, Big Tech companies would not say that since they typically operate in verticals where they enjoy having no competition. They enjoy being incredibly dominant. Think Alphabet and its 90% market share for its Google search engine. Will they enjoy being a little guy in financial services? And what will be the regulatory response? There are already calls to break these companies. So imagine if they are getting big in financial services… Unlikely to end well!