Tech giants are starting to erode the boundaries between industries as they seek to provide consumers with the services they desire. Breaking into finance, the GAFAs (Google, Apple, Facebook & Amazon) have poured money into financial services such as payments and digital wallets, but will they be the next banks? Briony Richter reports from the latest Digital Banking Club
The first Digital Banking Club of 2018, sponsored by Intelligent Environments, discussed whether or not the GAFAs will become banks. Hosted at the formidable Law Society in London, the debate featured an illustrious panel to debate this very topical subject.
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Kicking off the debate, Simon Cadbury, director of strategy and marketing at Intelligent Environments, expressed his thoughts on social media companies and search engines considering becoming banks and why this topic should be examined. He stated: “We first saw Google and Apple have a go at payments. Then we saw virtual branches on Facebook.
“However, for some time the thought of these tech giants actually becoming a fully-fledged bank with a banking licence has felt a bit farfetched, but the debate hasn’t gone away. First, Open Banking offers them an interesting route into Banking and then, as if by magic, the Wall Street Journal has run a story suggesting Amazon are seriously considering becoming a bank, in partnership with either JP Morgan Chase or Capital One. Therefore, timing of this discussion is great and I’m looking forward to debating whether this is going to be a reality.”
The challenges and opportunities from the GAFAs
The new regulations of Open Banking are designed to encourage collaboration and competition. But will the GAFAs be the ones to harness the opportunities that PSD2 offers? Within the financial industry, payments are where tech giants could cause the most disruption to banks and other financial institutions.
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By GlobalDataGAFAs already have a significant presence in the financial sector. Facebook is integrating person-to-person PayPal payments into its messenger app, Amazon is now providing loans for SMEs, and Apple will allow iMessage users to send cash to each other.
Oliwia Berdak, principal analyst at Forrester, author of a paper, titled ‘Why Google Bank won’t happen,’ explained that some of the tech giants like Google will be able to offer more tailored financial tools, but the likelihood of them becoming banks is small.
She said: “Amazon cannot legally become a bank because of regulation in the US, which separates commerce from banking. However, it can partner with someone in order to start offering current accounts.” Berdak continued by saying that this type of move could be wise for tech giants, not because they want to undermine banks, but because those companies are building an ecosystem of services for their customers, most of whom are merchants and retailers.
“It’s about removing friction for the customer journey, for example, lowering transaction fees, lowering interchange fees or offering global commerce payments. Amazon has to do this because without financial services, its ecosystem is incomplete.”
Incumbent banks meanwhile, often lean on these companies for strategic digital solutions, such as cloud computing. Due to regulation, especially in the US, many financial services are off limits to the GAFAs. However, more lucrative areas with lower barriers to entry – such as transaction services – may be at risk of disruption in the coming years.
Banks are increasingly becoming out of touch with an ever-growing digitally savvy consumer base. Nick Ogden, founder and chairman of ClearBank, argued that this is where the tech giants perform significantly better.
“They interact with their customers. They understand the need to interact and they also acknowledge the demands.
“Are they going to go through the pain of getting a banking licence? My strong recommendation is that there are better ways to spend your life. However, are they going to partner up and use the distribution to create a niche distribution channel to support the partnership levels of banks? I think that is highly probable,” Ogden added.
Alessandro Hatami, founder of Forestreet, also agreed that it is unlikely that the GAFAs will become banks; however, consumers will buy banking services from them.
“That’s going to be the core proposition. They have very different objectives and not all of them are financial but they have closer relationships with clients.”
He added, “GAFAs will use access to existing banks to create banking propositions within their platforms that people will use.”
Hatami also stated that payments will define the future in the financial sector. “I think payments are fundamental. Without payments, banking doesn’t exist.”
GAFA partnerships
As there are rumours of Amazon partnering up with JP Morgan Chase, a poll question set to the audience asked, ‘How would you feel if your employer was to partner with a tech giant in a white-labelling initiative?’
Final results showed 84% of participants would be in favour of such a partnership.
Blomfield, CEO and co-founder of Monzo, was asked whether he would consider a partnership. “We wouldn’t,” he responded, “I think it speaks to the different models. We are opening around 60,000 or 70,000 current accounts a month so we can get to scale pretty quickly in the UK on our own.
“There is an adoption cycle. Our early adopters were 92% male. Then you move on to early mainstream and late mainstream. Only 40% of our customer base is in London; 60% is outside but still focused on metropolitan areas. Around 50% of our customers are between the ages of 20 and 30, 25% are between 30 and 40 and a further quarter are upwards of 40.”
At the beginning of the debate the audience was presented with the motion, ‘This house believes your next bank will be a GAFA’. For the first vote, the results showed 44% were for the motion and 56% were against. After the debate, the same motion was set and the results showed a change of heart towards the GAFAs. Only 26% voted for the motion and 74% against.
Cadbury concluded: “It’s been a fantastic debate. I think we have come to the conclusion that the GAFAs are not going to become fully licenced banks in their own rights, but are likely to become white-labelled ones in select markets.
“One thing we didn’t really touch on was what banks can learn from GAFAs in terms of culture, technology, approach and strategies. There is definitely a way to go, all banks that think like the GAFAs, and become more like a tech company in that respect, will definitely reap competitive advantage over their peers.”
