The world of modern banking is in a state of flux. ‘Out with the old, and in with the new’ is the philosophy slowly being adopted by the traditional players due to customer expectations and the evolution of technology. Though, whilst banks gradually try to become tech firms, tech firms have already been reinventing the concept of a ‘bank’. The revolution is being led by thousands of small fintech companies across the globe, but there’s somewhere else we should be looking as Apple, Google, Facebook and Amazon shrewdly make their plays into the sector.
Before we begin, let’s look into our crystal ball and make some predictions. First off, in the not-so-distant future, nobody will use cash. It’s unlikely we’ll have ATMs and retailers won’t have cashiers.
The second prediction is today’s banking technology won’t be able to successfully provide for customers’ real-time, connected, user-friendly expectations of what a bank is supposed to provide because, fundamentally, banking technology is awful. There are great companies developing some amazing technologies, but the big banks are just too archaic right now to make substantial changes. We’ve heard a number of industry-insider stories of banks spending £5bn on a £2bn technology transformation; and this type of overspending has become the new norm. Tech companies don’t have these problems; they get to ‘start now’ with some of the brightest experts in the world already working for them - and without all that red tape in the way.
My final premonition is the general public's relationship with banking will change so dramatically over the next 10 years, it will be hard to recognise a 2019 bank from a 2029 bank. So, essentially, there are two sides to this story: those trying to make banking better and those who are making technology do banking functions. This is called Fintech vs Techfin. Here’s how Chris Skinner, industry influencer and non-exec director at 11:FS, describes it:
“Techfin firms start with technology and wonder how that can be used for commerce and trade. Alternatively, fintech firms start with existing trade structures and wonder how to make them cheaper and faster with technology. I liken it to fintech firms are making faster horses whereas techfin firms are working with airplanes.”
So, what is it banks really do?
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Let’s think about how we engage with our bank on a day to day basis. We lend credit or loans. We make payments from one bank to another to pay for goods from another person or business. Some may even make international payments which involve FX. But outside of those three overarching examples, banks don’t do a whole lot. The complexity sits with the technology, the layers of cyber-security and the revenue model. Now, consider your bank and ask yourself whether Google could achieve those tasks - and would it also mean I could search my bank statements better? Or could Apple perform my banking activities and it would mean all my devices would talk to each other to help me manage my money? Maybe Amazon recognises my spending data, predicts the next item I’ll need and suggest the best one rated by most users within my current banking app? The answer? Yes, to all.
Now consider this: could your bank do that? Probably not. This is due to a number of factors that include: the financial services industry’s brain-drain on highly desired technology skills, a lack of vision across the industry at the top levels and the archaic technology propping up these terrifyingly temperamental institutes.
Breaking down the GAFA companies
It’s a shared view that the role of traditional retail banks will shift from B2C market offerings and feel-good advertising, into purely being providers of liquidity to the tech firms. The bank’s business model, therefore, becoming that of a utility. In the short term, this is a perfect situation for the tech firms as they’ll have a lot of support from a regulation point-of-view, with close government ties, and be able to focus on their customer’s wants and needs. In the long-term, there isn’t anything stopping the tech firms providing their own liquidity and government relationships, thus eventually making banks redundant. So, let’s take a look at the top four technology businesses and their developments into banking.
Look at Apple’s track-record for entering industries and killing the competition. With this in mind, the new Apple Card sounds worrying for the banks. Apple’s not a small fintech company that you can buy in a record acquisition, or force into a partnership. It’s a tech giant with massive data and a captive, highly loyal user base. As a comparison; at the beginning of 2018 Apple boasted 1.3 billion active users, while the largest bank in the world by assets - Industrial and Commercial Bank of China - benefits from 567 million personal customers.
For any Apple fans - full disclosure, I’m writing this on a mac, with my Airpods in and my Watch monitoring my heart rate, so no bias here. The joy of owning a machine or device owned by the company is different from buying any other piece of electronics. They’re a company that has constantly rewritten the rules around how to serve customers, from dropping the aux port from the iPhone to releasing a $1,000 monitor stand. Whether you love them or hate them, they’re market leaders in almost everything they do. It’s inevitable they’re coming for financial services and they’re guaranteed to change the rules.
Google - AI driven banking
Google entered financial services via payments when they released ‘Google Pay’ in September 2015. This offering allows users to send money P2P, make in-app purchases and allow tap-to-pay capabilities from a user’s phone. Google has stayed true to its experimental culture and has even created a number of integrations with their voice assistant and payments but, sadly, they’ve been faced with criticism that this functionality is ‘beyond useless’.
Current banking successes - and failures - aside, the important takeaway from Google is its commitment to artificial intelligence (AI). Alphabet - Google’s parent company - bought Deepmind in 2014 for a reported $400m, even though the business had no revenue generating products at the time. The company has been developing narrow AI for the last nine years with recent achievements in human vs computer gaming beating the world champion of ‘Go’. So, how can this be applied to banking? One area is predictive buying and saving, which can put your relationship with money on autopilot. Just like driving a Tesla, you’ll be able to lay back and let Google ensure your rent is paid, you have food being ordered, and if you don’t have enough, you can trust Google to take the best credit card with the lowest APR to get you by.
The real challenge for Google is regulation. Regulators usually turn up to the party after the party’s got out of control. How does FCA tackle a company like Google? Fines, sure, but they have a 63 per cent profit margin, so it’s hard for fines to incentivise safe behaviour. The regulators have a huge challenge on their hands, not regulating bad humans who act recklessly but keeping a watch on the bad robots.
Facebook has been hinting at entering the financial services space for some time with its P2P payment product, which was recently closed down (15th June, 2019). But when one door closes, another one opens - and Facebook’s recent hire of Edward Bowles, senior bank lobbyist from Standard Chartered, shows a bullish move towards cryptocurrencies and ensuring regulation doesn’t become an issue. This is huge and spells the beginning of an exciting journey for micro-transactions.
Trust is an enormous factor with Facebook. We’ve seen over and over that the company struggles to regulate the platform; examples being terrorist propaganda videos doing the rounds, foreign interference, fake news and - more recently - its inability to control deep-fake videos of Mr Zuckerberg himself circulating the internet. Now, how to then ensure the additional payments and monetary incentives to the platform isn’t going to pour fuel on the dystopian, Orwellian social site that Facebook has become in its 15-year history?
AWS is the king of online hosting and cloud. So, what better place to put a frictionless, always accessible bank. And why not create an Amazon coin to go alongside this to ensure the business doesn’t just own data, capabilities, communication channels but also, the actual money itself. They are our new overlord. All hail, Bezos.
But seriously, take a look at your bank statements over the years and observe how your purchases on Amazon have increased. For me, it started with Prime, then Audible. Web Storage came along, as did Alexa and I’ve recently setup with Amazon Fresh. Why not let them hold the money that you’re inevitably going to be giving them anyway via purchases?
Amazon’s competitive advantage is its ability to build cloud-banking much more securely than banks. It’s leading in the cloud, so this means your banking would no longer need to be local, it can be global. One account for all currencies. CB Insights has produced a 64-page report on Amazon’s strategy and makes an interesting observation on page 60 about its dive into finance, which I recommend you take a look at.
The good, the bad
Overall banks’ tech is pretty poor by 2019 standards, but all that’s about to change. Personal Banking, 24 / 7 is what the future of banking will look like and it’ll be global over local. As a 30-year-old who does most of his work and personal activities on a mobile device, I still think it’s strange when I need to include the specific address of the branch where I opened my account when I was 13.
However, we need to remember, banks make money from debt, so if the banks of tomorrow know everything about you - which they will - is there a motive to push you down?
But there’s not stopping the big tech players from entering and taking over; it’s already happening. Tech’s aggressive and banking is a sitting duck.
Sam Gormley, founder, Osaka Labs