The dismantling of bank brands by big tech
We’ve all heard the rumours. We’ve read the headlines. We’ve even been predicting it for years. Big tech is coming for financial services and if there is anything to learn from other sectors, nothing will stand in the way. In the last 18 months, Apple, Amazon and Facebook, among others, have made clear moves into FS.
Big tech has the resources and technology to deliver a rich banking experience. They have substantial user bases to get them off the ground too. But can they grow consumer trust in a sector with notoriously low levels of consumer confidence? And can they be trusted with their financial data to manage their financial lives?
Here at Equator, we looked at the moves the tech giants made over the last year to help established FS businesses understand what’s round the corner and what they can do to help mitigate this risk.
Apple and Amazon grow their presence
Apple launched a credit card in the US in partnership with Goldman Sachs, one that is likely to expand to Canada and other territories later in the year. Little is known about how successful the credit card has been to date. The system underpinning it, Apple Pay, is flying, with exceptional growth in uptake witnessed during the COVID-19 pandemic. With its loyal, high net-worth user base and a need to diversify revenue sources, Apple is only bound to deepen its footprint in this space.
Amazon, meanwhile, subtly entered the fray with Amazon One, its palm-print based payment system. The system does what it says on the tin, enabling customers to link their payment cards to their palm print, moving authentication to identification and simplifying the payment process. It is currently only available for use in Amazon’s Seattle stores, but a rollout is expected to see widespread adoption.
PayPal and Facebook re-up their game
On the other hand, Facebook, ran, stumbled, and fell with its cryptocurrency offering, Libra. Despite its initial failure, it is set to make a return in 2021. Following the loss of many banner partners and continuous privacy scandals, Facebook’s ambition to enter our wallets has only been curtailed for the time being.
Conversely, the oldest fintech in the game, PayPal has seen a renaissance since it parted ways from eBay. It now plans to deliver banking services through third-party partners and has already added support for cryptocurrencies, a Buy Now Pay Later functionality, as well as improving its Venmo offering.
PayPal has ambitions that mirror the success of Alipay in China, adding investments and savings, identity management and budgeting to the current payment, shopping and crypto platform. A super app’s benefits however can only be realised when the data flows freely through the system, allowing ML-powered toolsets and insights. And the data only flows when you have a critical user base. PayPal’s ambitions are a reminder that scale and data are the most significant success factors in being a digital financial partner.
The expected success of Google
All these efforts pale into insignificance when placed next to Google’s Plex platform, as well as a radical upgrade to the basic Pay app. This dual-fronted attack on finance is the most comprehensive integration of personal finance tools ever seen.
In Google Pay, a user can now make peer-to-peer payments as well as typical retail payments. Google has integrated payment options for restaurants, petrol stations and car parks. It aggregates and presents merchant offers, cashback and loyalty schemes, while built-in Barcode and QR scanning, make showrooming (searching online for a better price instore) easier. Finally, Pay taps into Gmail and Photos to search for, aggregate and attribute receipts to transactions.
Plex takes all the above functionality, hardwiring it into a Google-branded current and savings account. In a step echoed by its peers, Google isn’t entering this market on its own. Lacking a banking licence, Plex’s launch sits atop partnerships with 11 US banks and local credit unions, notably smaller regional brands.
Highlights of Plex accounts include fee-free banking, real-time alerts, and AI-powered financial insights, which is expected to be Google’s critical edge. With so much data at its fingertips, Google will offer best-in-class money management guidance and potentially appropriate products or services to support users. Critically, it is not using this insight for ad serving.
Whilst still a few months away from full launch, the platform is bound to be a reasonable success, and interest should be sufficient to grow business for all brands concerned. However, what is less clear is who the long-term winners in this arrangement will be.
As banks are already finding with Apple Pay and Google Pay, they’re losing many interchange fees from customer transactions. As well as this, they’re losing some visibility on the nature of the transactions too. In short, their role in the consumer payment relationship is weakening. When you consider further that there is no physical card anymore, the bank’s brand and emotional presence are further depleted.
Fast forward a few years into a customer Plex relationship, and the user will more likely associate their banking relationship with Google. Just as with Apple’s relationship with Goldman Sachs, the bank very much plays second fiddle in the brand stakes. This may be further compounded as Google could cement a wide range of Plex partnerships, including loan, credit card and investment providers, also dismantling the critical PCA relationship value typically held by the bank brands.
Looking at the moves these tech giants are making, it is only expected that traditional bank brands will feel uneasy. They're sitting on poor customer reputation statistics, outdated hardware and an expensive legacy of branches and staff. But they still have a place in society. And it is not too late to change their businesses.
Refocusing on creating better customer relationships is key. If they’re to stand a chance against the big boys of tech, they need to improve customer experience, deepen relationships, while lowering costs and creating greater personalisation. If the future of banking is increasingly virtual, these elements are vital in remaining relevant.
This article was contributed by Garry Hamilton, Group Chief Growth Officer of Equator
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.