“We have no intention of becoming a bank”: Is Big Tech really a threat to banks?
- While Big Tech companies can be intimidating, the oftentimes overlooked factor is the underlying strategy behind their expansion into financial services.
- Big Tech companies are not coming into the industry to compete with banks as a unilateral force - they are looking to partner to enhance their own business.
When big technology companies start to expand into different industries, they are quick to be labelled as ‘disruptive’. In the financial services sector, the circulating rhetoric has been that Big Tech is coming into the industry as a unilateral force to compete with banks.
“The industry tends to talk about this kind of big tech threat as one overarching problem, and I think that's really the wrong characterization,” Kate Drew, director of research at CCG Catalyst told Tearsheet.
Big Tech is a nickname given to the five biggest technology companies in the world: Apple, Google, Facebook, Amazon and Microsoft. While Microsoft just recently announced its first consumer fintech move by adding BNPL into its browser, the other four are all more established players in the space.
The sheer size and capabilities of these companies can be intimidating, as is their advantage of having an existing user base of millions of people to offer banking products to. However, the oftentimes overlooked factor is the underlying strategy behind their expansion which, upon a closer look, suggests that direct competition with banks is not really on their main agenda.
“Each of these companies is trying to find a way to play in financial services, not because they want to be in financial services, but because they want to make their core value propositions more attractive and financial services are a way to do that,” Drew said.
Driving value to their main products and services is their actual end goal, as opposed to chasing industry returns by competing with incumbents, added Ron Shevlin, director of research at Cornerstone Advisors. “Providing financial services, whether it’s payments, loans or BNPL, helps drive loyalty to their core business,” he said.
The reason why financial services add value to Big Tech companies is because fintech is the strongest candidate to be the epicenter of super apps. A super app is a single mobile app whose basic services include chat and payments, along with a suite of services from third parties, ranging from food delivery to media content. Already established in major global economies like China (WeChat) and India (Paytm), super apps have taken over the internet in most of Asia.
While there’s a lot of skepticism on super app adoption in the West, there is a race to replicate this business model. Super app or not, these overseas trends clearly show that the next evolutionary step of a large technology company, whether it started in social media or e-commerce, is to add financial services under its umbrella. For example, payments were the foundation of super apps abroad, and payment capabilities are already present in Big Tech, like with Apple Pay, Google Pay, Amazon Pay and Facebook Pay.
Apples and pears
As Big Tech companies started to roll out other banking products, such as credit/debit cards and lending, this fuelled the debate that labelled them as a unilateral force coming into the market to take business away from banks.
However, a short analysis suggests that not all Big Tech companies want to be competitors. In fact, their strategies are different, revealing a dichotomy in their interaction with the incumbent industry.
On one hand, Amazon and Google are actually opting for a collaborative approach with the traditional finance market. This has been a lifelong strategy for these two companies, which got to where they are by enabling consumer choice, not by focusing on selling their own products. As it is more core to their business to be a platform, they’re aiming to offer more products with as many partners as possible rather than going at it alone.
“Amazon and Google have definitely taken more of an approach to be a vendor towards financial services firms versus direct competitors to them,” said Shevlin.
Google’s now scraped Plex project was perhaps the best example of this partnership approach. The tech company had teamed up with 11 banks for the project, allowing users to choose which bank they wanted to open an account with. The accounts were to be integrated into its payment platform, Google Pay.
There were reports that the project was sidelined as the company didn’t want to be seen as a competitor to banks who use Google as their cloud services provider. The WSJ reported that Google’s eCommerce operations head Bill Ready “was concerned that Plex could make other banks think that Google was out to compete with them since it played a lead role in building the product.” However, there was also speculation around internal politics, as the team leading the Plex project had left the company.
“Where I really see Google doubling down now is in two ways: making it easier for financial institutions to do their jobs through Google Cloud, and then further developing payments tools like Google Pay,“ Drew said.
Moreover, Google has repeatedly said that it does not want to become a bank, but wants to work together with the ecosystem to launch and scale products.
“We’re not planning to become a bank or a remittance provider,” Josh Woodward, Google Pay’s director of product management, said in an interview with CNBC. “We work with the ecosystem that already exists to build these products.”
Amazon created a digital space for merchants to sell their goods, and this is also what it has in mind to do with financial services.
After introducing a small business lending program in 2011, the company partnered with Bank of America in 2018 to further expand. Amazon then reportedly considered creating an online lending marketplace where other banks could sell their banking products, but ultimately scrapped the idea and opted to work exclusively with Goldman Sachs to offer small business loans. The Goldman credit line competes with the term loans that Amazon has been offering for years through the corporate credit facility from Bank of America.
“Amazon's vision is to make its e-commerce marketplace as attractive as possible to consumers, and merchants. I don't think that Amazon is going to become a bank, but I do think that it has one of the most thoughtful strategies for how it's building out its financial services ecosystem,” Drew said.
On the consumer side, it has been rumored in the past that Amazon wants to offer a checking account, but the plan never materialized. Reports said that the company told JPMorgan Chase that it was concerned it would become subject to banking regulations, so it scrapped the plan.
However, this may not be the actual reason behind the pullback as regulation is not an issue in a market where challenger banks rely on existing banks’ licenses and compliance capabilities to deal with regulatory matters, according to Ron Shevlin, an industry expert.
“That wasn’t because they're afraid of regulation -- they just probably haven’t seen the dollar potential for it,” Shevlin told Tearsheet.
“But they are smart and they know there's a lot more money to be made by offering everybody's products and taking a cut on it and then monetizing that. It’s just a matter of when it fits,” he added.
On the other hand, Apple and Facebook have been taking a more market-facing approach to offer financial services to their users, but prioritizing engagement in the ecosystem. Their strategy has been to integrate payments into their chat applications and increase their presence into the financial lives of their existing user base.
“Facebook and Apple, in particular, don't partner well. It's just not part of their DNA. They like to own everything -- they like to do it all. To get into payments, they didn't build their own rails. They had to use the existing rails, but they're not very friendly to a partnership. They're definitely going their own route,’ Shevlin said.
For Apple, one illustration of the ecosystem-focused strategy is the way the company engineered its biggest move in the financial services space: the Apple Card, introduced in 2019 and backed by Goldman Sachs. The interesting catch is how the company created the card’s rewards program around its mobile payment and digital wallet service, Apple Pay, to keep the money within its ecosystem.
Apple had no interest in competing with the wider market to offer 3% on travel, restaurants or other things. Instead, it gives 3% back only on spending with selected partners and only when purchased with the Apple Card through Apple Pay. Purchases made with the Apple Card outside of Apple Pay and not on Apple products get rewarded the least, with only 1% cash back. Moreover, all cash back rewards are deposited to an Apple Cash account that can only be used via Apple Pay.
“It's about keeping people, money and developers in its ecosystem. The real move for Apple is enhancing the services for consumers using its products, and keeping those services and products as sticky as possible,” Drew said.
Meanwhile in the Metaverse, Facebook’s journey into the financial services industry hasn’t been very successful but the company seems adamant on making it happen.
It announced its new cryptocurrency Libra and digital wallet Calibra in 2019 that would enable users to transact and transfer funds with near-zero fees and created the Libra Association but the project was short-lived due to mounting pressure from regulators. Just a few months after the launch, PayPal, eBay, Visa, Mastercard, and Stripe announced they would no longer be part of Facebook’s cryptocurrency project.
Then the company revamped its fintech operations and renamed the wallet Novi while launching another cryptocurrency Diem - this time a stablecoin, which is a cryptocurrency pegged to government-issued currency.
Developing Novi as its fintech platform, Meta has its eyes set on challenging the payments industry. Like Apple, Meta wants to have a digital wallet for its existing user base that will also facilitate payments globally. Currently rolling out as a pilot program in the US and Guatemala, the goal is for people to transfer money to each other instantly with no fees using Novi Wallet.
Evidence suggests Meta is likely to be a competitor in the remittance market, rather than in the wider banking industry, at least at first. Long term, Meta could be planning to use Novi beyond remittances to bring it closer to the super app model and compete with the likes of PayPal. After all, it’s the best positioned company to follow the WeChat model, building on its large user base and integrating more features to increase its presence in people’s financial lives.
However, troubles still seem to plague the project as it suffered a number of high-profile exits this year. One of the project’s co-founders, Kevin Weil, left earlier this year. Its other co-founder, David Marcus, was left at the helm but he also announced his departure just this month. Former Upwork CEO and former VP of Product for Novi Stephane Kasriel will lead Meta’s cryptocurrency unit starting next year.
In any case, it is increasingly clear that such fintech projects are designed either for one’s ecosystem or to serve a market, not to be competitors to banks. All the Big Tech companies have partnered with banks to expand into financial services and didn’t express any plans to pursue a banking licence.
Perhaps the real emerging concern is banks’ changing role in the new financial infrastructure that will be created. Big Tech will continue to push in the space, and to do this, they will need partnerships - opportunities for the incumbent banking industry to expand their operations by doing what they do best.