Mark Zuckerberg announced a significant milestone for Facebook last month – the social media platform experienced over 1 billion users in a single day. With such influence comes great power, so where might the tech giant head next?
The launch of Apple Pay and Android Pay by Google will likely prompt another wave of forecasts that global tech giants – the likes of Google, Apple, Amazon and Facebook (GAFA) are muscling in to tread on the banks’ toes. Could this be the next destination for tech giants?
The reality is that these tech giants are unlikely to ever become banks due to stringent regulation and compliance requirements and slow growth rate in the banking industry compared to what is experienced in the tech industry. In fact, why would they want to become banks? They can happily and successfully work around the fringes of mainstream banking, to offer payment services, money transfers, remittances and loans, without buying a banking licence – or going anywhere near the core deposit account base.
These technology brands have enormous global customer followings, and – particularly in Apple’s case – unrivalled brand loyalty amongst users. They excel at customer service, and are agile enough to respond to new user needs and demands.
Banks should be worried – not because these businesses are trying to become banks, but because they’re not. The thought that will be keeping bank executives up at night, is the possibility that their institutions will be reduced to being the ‘dull but necessary’ core infrastructure, white labelled behind the glossy fronts of well-loved brands, who will be the face of financial services and enjoy the associated customer relationships.
Essentially, one bank’s products are the same as another’s, they’re undifferentiated – a loan is a loan, a mortgage is a mortgage and a credit card is a credit card. The only two aspects that could be different are the ‘real’ prices (though this is usually hard to establish due to deliberately hidden costs), and the branding and marketing.
This lack of differentiation, coupled with what seems to be a constant stream of banking scandals and account outages - not to mention the poor customer service delivered in branches and on the phone - means that consumer trust and confidence in the banking system is at an all-time low. Customers are looking for quick, slick service, and will no longer tolerate waiting hours on the phone, only to be told that they will need to head into their local branch to rectify the problem.
This is exactly where GAFA have the chance to capitalise on the banks failings and lack of customer-centric thinking. The likes of Facebook and Amazon are well established household names – they are in our homes, at work, and in our pockets. If you trust Facebook, why would you be averse to acquiring a loan through them?
Amazon has already put the wheels in motion by launching the lending arm of its business where it will offer loans to SMEs through the Amazon Market Place. Whilst this will begin as an invite only platform, Amazon hasn’t discounted the idea of opening this up in the future. This is indicative, I think, of the way that the financial sector could go, “front-end” customer-facing brands extending their offering to cover financial products, for both businesses and consumers.
So how would it work for the consumer?
In the hypothetical example of the Facebook loan, they wouldn’t actually provide the loan to consumer, they would simply manage the request and auction the loan off to a pool of banking partners before selecting the best option. As a consumer, the likelihood is that you won’t then care which loan the bank comes from, but will look for the frictionless process to get your loan under the best conditions.
The process would work as follows: the customer will already have their account, or will be registered with the provider, like most people are nowadays (you’d be in the minority if you didn’t have a Facebook account or an Apple ID). By being registered with their name, address, credit card number, etc, the majority of the ‘know your customer’, and compliance steps will already be done, instantly making the process smoother.
When the customer then requires a financial product, for example, a loan, they will go to one of these tech giants, whereby the company will carry out a ‘request for quote’ to several banks, with the best offer winning.
Essentially, the only interaction the customer has will be with the tech company, meaning the process will be limited to just conversing with that one, well known and frequently used brand. Banks then lose their customer relationship, and also face increased pressure on their profit margins. Everyone knows that the party that owns the customer relationship is in power. This new world would force the banks to compete merely on price.
Is this a possibility?
Most of the time, banks advertise themselves as being far from what they actually are. We often see television adverts claiming that they are a supportive and accommodating partner, helping you with your every banking need.
In fact, they are really a ‘black hole’ that lacks the consumer relationship that they claim to have and that GAFA have so successfully mastered. Every time someone has a bad banking experience, banks push their customers further away, the opportunity for tech giants to capitalise on this grows, and the situation I have described moves closer to a reality.
Tech giants have a real opportunity here to make the most of their brand loyalty to provide alternative offerings and move into new territories. Whilst a few select banks may once have controlled the marketplace, most regulation is now FinTech-friendly, and bank dominance is no longer the only way forward.
Google has already tried to break into financial services with its payment solution based on Gmail, Facebook recently got its e-money licence to offer financial services in Europe and Paypal has started offering short-term funding to its business clients. With the Alibaba-affiliated platform for money market investment, Yu’e Bao, having already amassed $92 billion in assets in just under a year, tech giants’ appetite for financial services is growing, and so far proving successful, topped off most recently with the launch of Amazon Lending, and the launch of Apple Pay
For me, it’s only a matter of time before the banks will have to succumb to the ever growing dominance of GAFA, and will be reduced to the faceless service behind the tech-owned customer relationship.
Philippe Gelis, CEO and Co-Founder of Kantox