One of the first posts I ever wrote on Lend Academy back in 2010 was about mulling the idea of Facebook becoming a bank. Of course, I didn’t mean a brick and mortar type of bank but a digital bank of some kind. Seven years later this has obviously not come to pass but tech behemoths like Facebook are showing more interest in financial services.
GAFA is an acronym for Google, Amazon, Facebook and Apple, the largest tech companies in the world. Historically, these companies had stayed out of finance for the most part but in recent years that has changed.
Google and Apple both have payments products that have gained some traction in this country. Google and Amazon have small business lending arms that are providing financing to their existing small business clients. Facebook has their popular Messenger program that is starting to attract new initiatives from both fintech startups and big banks.
I would add PayPal into the mix here as well. They are on a fantastic run lately and their core payments business continues to expand. They also have a successful small business lending operation but like Amazon and Google this is focused on extending credit to their existing customers. What would happen if these companies decided to expand their focus beyond their own customers and take on banks directly?
McKinsey Report on Banking
Last week McKinsey released their annual banking report and it has created quite a stir in banking circles. McKinsey argued that platform companies like Amazon are well positioned to challenge big banks:
By creating a customer-centric, unified value proposition that extends beyond what users could previously obtain, digital pioneers are bridging the value chains of various industries to create “ecosystems” that reduce customers’ costs, increase convenience, provide them with new experiences, and whet their appetites for more. Not only do they have exceptional data that they exploit with remarkable effectiveness but also, more worrisome for banks, they are often more central in the customer journeys that include big financial decisions.
Amazon has always had an almost maniacal dedication to customer experience. And CEO Jeff Bezos has shown a willingness to enter big new industries to disrupt them and quickly become a leading player. Finance is one of the biggest industries of all and one where customers are most dissatisfied with the status quo.
Does this mean we will see Amazon Bank in the near future? Not necessarily. It was in the mid-90s when Bill Gates famously said that in the future banking services will be necessary but not banks. I think this quote applies very directly to the next 10 years. While there has been some talk about companies like Amazon obtaining a banking license they may be able to offer many consumer banking services without one.
The New Fintech Partners of Tomorrow
Now, Amazon clearly does not have all the financial capabilities to offer a full suite of banking services today. But lucky for them there is an established fintech ecosystem with startups and some more mature companies tackling every single niche in finance.
While we have not seen much in the way of partnerships yet, in many ways companies like Google, Amazon, Facebook or Apple make a more natural partner for fintech companies than established banks. These tech behemoths know what it is like to move quickly, to test and adapt and they have a culture and mindset that is more aligned with fintech companies. By partnering with (or acquiring) fintech companies GAFA could very quickly become a force to be reckoned with in any finance niche.
Lessons from China
In China we have seen the tech giants move into financial services in a big way. Alibaba spun off Ant Financial in 2014 and it is now the largest fintech company in the world. It is the creator of the ubiquitous Alipay payments app with a user base of almost 500 million people. They also run the world’s largest money market fund, Yu’e Bao, with over $200 billion in assets. And for good measure they recently started a digital bank call MYBank.
Alibaba’s archrival is Tencent. Their first major product was a messaging app called WeChat that has an astounding 750 million daily active users today. They are also entrenched in financial services with a payments service called Tenpay and like Ant Financial they recently launched a digital bank, called WeBank.
My point is that if the tech giants in the US want to see a path to domination in financial services they can look to their counterparts in China. Having said that, the two countries are very different and what worked in China will not necessarily work the same way in the US, but some people think that China is leaving the US tech giants behind. So, clearly lessons can be learned here.
The Tech Financial Lobbying Group
Financial Innovation Now (FIN) was founded in 2015 in Washington DC and this is how they describe themselves:
Financial Innovation Now is an alliance of technology leaders working to modernize the way consumers and businesses manage money and conduct commerce. We believe that technological transformation will make financial services more accessible, safe and affordable for everyone, and we promote policies that enable these innovations.
Its members include Google, Amazon, Apple, PayPal and Intuit. The one tech behemoth missing is Facebook and I wouldn’t be surprised if they joined this group at some point. Today, FIN is active on Capitol Hill educating lawmakers and regulators and supporting new legislation that “encourage the growth and adoption of new financial services technologies and products.” It is another indicator that these companies intend to make a bigger push in finance.
Where We Go From Here
Banks are still some of the largest and most profitable institutions on the planet and their embedded position in finance is formidable. But I also think that consumer preferences are changing fast and banks are struggling to keep up.
In 10 years time I still expect large banks to have mostly maintained their entrenched position as the leaders in finance. But I think we will see the likes of GAFA taking market share by offering banking services that people love. I think the banks will find it far more difficult to grow than ever before and their return on equity will have declined considerably from today’s levels.
We are entering a fascinating new phase in fintech. In many ways the options are limitless but the competition is also fierce. Banks and fintech companies alike should be paying close attention to the movements of the big tech companies. I expect we will see some more activity here in the coming year with regards to fintech/tech partnerships and possibly an acquisition or two. I also think we will see more initiatives between big banks and big tech.
We live in interesting times. The pace of change is increasing and I am very confident there will be some truly fantastic innovations in finance in the coming decade. And in the end the consumers will be the real beneficiaries of these changes.
A lot of banking comes down to economic rent collection. It’s hard to become a bank in a meaningful sense because of both the regulatory hurdles and the difficulty of attracting large pools of stable capital. But once you are a bank, it’s easy to make money.
This is a clear case where a legacy industry is ripe for disruption, but the incumbents are well aware of the risks they face, and they are extremely well capitalized. If you look at the big banks, the list of names does not change much (other than mergers between banks) over time. There’s a reason for that.
The success of GAFA and associated companies in bank services will depend mostly on how willing/able the big banks are to transform as needed to defend their territory.