What Google’s foray into banking means for incumbent and challenger banks

As increasingly tech savvy consumers opt for digital first finance solutions, tech companies are seeking access to user financial data as an additional revenue source. In 2019, Apple launched its credit card in partnership with Goldman Sachs. Facebook is in the works of developing its cryptocurrency venture Diem, formerly known as Libra. Amazon lends billions of dollars to merchants in its marketplace. And now, Google is entering banking.

Google recently revamped its Google Pay app and announced its partnership with 11 banks for the 2021 launch of its consumer bank accounts. Plex accounts by Google Pay will be integrated into the newly designed app and will combine the regulatory protections and financial expertise of banks with Google’s technology and user experience. 

“There is a need for new experiences to meet the evolving needs of a new generation of customers who have grown up mobile first in an environment where everything from hailing a cab to opening a bank account can be done with simple taps on a mobile device,” said Google’s vice president for payment ecosystems, Felix Lin.  

“In response to this need, we recently launched a redesigned, mobile-optimized Google Pay that makes it easy to pay, send money, split expenses, save with offers and rewards and stay on top of your finances. Plex accounts are a new mobile-first bank account integrated into Google Pay.”

Banks partnering up with Google will undoubtedly reap the benefits of its technological prowess, global scale and massive customer base. Google’s access to huge amounts of user data can be utilized to provide consumers with tailor-made financial solutions. 

The pandemic has accelerated consumer reliance on digital banking. Banks, like Citi, are stepping outside of the comfort zones afforded by physical customer experiences to enhance their digital offerings. 

“Customers today want and expect an integrated experience, where their relationship with their money operates at the same speed as the rest of their lives,” said Citi’s head of U.S. consumer partnerships, Elyse Lesley. “With customer needs rapidly changing and a whole new generation looking for a fresh, relevant and better relationship with their money, we want to empower them with an account built from the ground up with financial wellness and mobile functionality at the core of the design.” 

Community banks can partner with big tech to provide world-class customer experiences that help them acquire customers they don’t normally have access to. Seattle Bank aims to do this through its partnership with Google, which is directly aligned with its current technology strategy. The bank’s Plex account will be built on top of its existing API architecture and cloud based technology. “There are currently very few community banks in the country with their tech stack based in the cloud, but others can and will make it happen, which will be great for their customers, their communities, and the viability of their franchise,” said Seattle Bank’s CEO, John Blizzard.

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BankMobile’s motivations behind partnering up with Google stemmed from the specific needs of its student customer base. “We viewed it as an opportunity to provide value beyond a traditional digital bank account and to foster trust with prospects by leveraging the Google brand,” said BankMobile’s CEO, Luvleen Sidhu. “If Google Pay’s future is successful as a ‘super-app’ aggregating search, e-commerce, offers, rewards, payment, and everyday money management in one, then our students will greatly benefit when using the BankMobile Plex account within the broader Google Pay experience.” 

Obvious pros aside, banks should also keep in mind some of the potential drawbacks of partnering up with Google. Big tech still fosters a level of distrust among consumers who are wary of how their data is being harvested and manipulated.“There is a chance of reputational risk if Google does mishandle any customer data, also if Google suffers any downtime. However, in that situation, it seems more likely the customer will blame Google,” said Sarah Kocianski, head of research at 11:FS.

Then there is the consequence of customers enjoying their Plex accounts a little too much.  

“A bigger risk is that customers find Plex’s service better than the banks’, resulting in customers closing their accounts with the banks and just using Google. That will mean lost revenue and lost engagement with the customer, making it harder to sell them additional services or build any loyalty,” said Kocianski. 

Google has reiterated that it is not interested in becoming a bank, a sentiment shared by many big tech finance players who would rather create peripheral banking services than to get bogged down by the red tape of regulation and compliance. Legacy financial institutions still have a leg up when it comes to bank licenses and consumer trust.   

“If Google or other big tech firms ever became a bank, it will kill their agility and innovation. That’s why most banks aren’t agile and innovative. They are slow and secure because that’s what regulations demand of them. No big tech firm could ever live with that,” said fintech analyst Chris Skinner.

In the long term, however, big tech could face greater scrutiny by regulatory authorities. A recent case in point is the tremendous backlash Facebook’s Diem has received by policymakers and regulators worldwide.  “Big tech will continue to innovate at the edges, threatening big banks. I expect that eventually regulators will look at this and come down hard on big tech firms’ forays into banking,” said fintech strategist, Alex Jimenez.

As big tech continues to emerge in the world of finance, traditional banks will remain relatively secure despite the disruptive nature of big tech banking. Regulatory legitimacy and long held consumer relationships safeguard traditional banks somewhat from technology-driven disruptions. Regardless, traditional banks still have much to gain from incorporating data driven mechanisms into their customer interactions. 

“Banks have always had a difficult time using data to the benefit of their customers and their institutions. Big tech finance players have built their technology infrastructure to leverage data from day one,” said Marcell King, chief innovation officer at Payveris. “Banks and credit unions who adopt a data driven approach to offering personalized user experiences and products will win in the long run.” 

Challenger banks have more to lose when it comes to competing with big tech finance players. Established tech companies like Google are more likely to foster customer interest than emerging challenger banks that have already struggled to gain traction in the U.S.

“Neobanks could partner with Google in the same way as traditional banks, but they have made a play to be the app of choice. The issue will be whether the customer sees it that way or would prefer Google’s apps to be the apps of choice,” said Skinner. 

Google’s vast resources may ultimately threaten the viability of challenger bank offerings. “They will never be able to compete in terms of providing merchant offers because they lack Google’s network of retailer connections, so what they should focus on is being transparent and honest with customers in order to bolster their reputations and offer a counter to Google’s for being opaque,” said Kocianski.