Big Tech in Finance: A Deep Dive Into the Future of Fintech
The following article looks at Big Tech and its impact on the financial services sector. Whilst competition from small fintech start ups will certainly take away some market share from traditional banks, the impact of “GAFA” could be huge.
Big Tech in Finance: A Deep Dive Into the Future of Fintech
The fintech movement did more than unbundle banking and its core services — it spurred financial inclusion across Asia, increased overall economic growth, and made significant inroads into the finance value chain. The born-digital companies brought technology to the forefront, attacking the traditional risk-averse sector from various points — digital payments, insurance, P2P lending, and investment management, among other avenues.
And over time, the tech-savvy startups transitioned from disruptive players to enabling partners. The offshoot — the last decade saw banks lean onto fintech startups and invest in emerging technologies to build a horizontal technology stack across products and services, infrastructure, and customer interface to expand beyond the realm of traditional financial services. Financial institutions have invested more than $27 billion in digital innovation and fintech since 2015, a KPMG report indicates.
On the other end of the spectrum, big tech giants Google, Apple, Facebook and Amazon dubbed as GAFA have shouldered their way into the financial sector, emerging from the backroom with niche customer-centric offerings — moving the needle from fintech to techfin. These hyperscalers, rooted in data-centric culture, have risen to challenge the long-standing financial institutions. With a string of strategic acquisitions, big tech giants are rounding out their portfolio to deliver end-to-end bank-like services and raring to grab significant market share from the incumbents.
Rise of TechFin As Non-Bank Financial Platforms
Silicon Valley heavyweights — Google, Amazon, Facebook, and Apple crashed the fintech party, with digital payments as a starting point (Google Pay, Amazon Pay, Facebook Pay, and Apple Pay). Moving on from payments, data-driven hyperscalers set the sight on bigger ambitions. Apple launched its credit card with Goldman Sachs in 2019 that eliminates processing fee and provides a new layer of privacy and security. Google stepped up its fintech ambitions by announcing the launch of checking account product in conjunction with Citigroup in 2020 that’ll be available through the Google Pay app. Amazon — a leader in the everything business, offers mature financial services offerings across payments and lending to 100 million Prime customers. In India, Amazon offers Amazon Pay credit card with ICICI Bank. If Amazon launches a checkings account, banks could lose up to $100 million, MX report indicates hinting at Amazon’s ambition to become a major force in consumer banking. In 2018, Wall Street Journal reported the online retailer was planning a checking account product with JPMorgan Chase & Co to target the younger segment.
Big Tech M&A in Finance
Google forayed into the mobile payments technology with Google Wallet in 2011, allowing users to pay through Citi and Mastercard. In 2015, the search giant announced Android Pay at I/O developer conference, which utilizes near field communication (NFC) technology for enabling transactions. In 2018, Google unified its digital payments offerings under Google Pay allowing users to pay on desktop, iOS, phone, and desktop. Google Pay has seen ubiquitous acceptance in India, emerging as the #1 non-banking option with 6.7 crore monthly users.
According to Research and Markets report, Google Pay users are set to grow at double-digit rates and is projected to catch up with Samsung Pay in terms of the number of contactless payment users by 2020.
Here’s a Look at Google’s Fintech Acquisitions:
- Zetawire: Google added mobile payments focused Canadian stealth startup Zetawire to its fold in 2010 to gain access to NFC technology, which paved the way for Google Wallet. The Canadian startup filed a patent application for an electronic wallet which allowed mobile banking, credit card transaction processing, and more.
- Jambool: Next up in 2010, Google scored another big win with the purchase of Jambool, and its Social Gold virtual currency platform to boost social commerce and monetization of apps.
- TxVia: In 2012, Google stepped up its efforts in mobile payments technology by absorbing TxVia, which helped the search giant establish a solid foundation for Google Wallet.
- Softcard: Softcard accelerated Google’s entry into the world of mobile payments and helped it take on its biggest competitor Apple Pay. The acquisition of carrier-backed (joint venture between Verizon, AT&T, T-Mobile) mobile payments company in 2015 gave Google access to its wide patent portfolio and up the game against Apple Pay.
- Ripple Labs: Ripple, a Google-backed blockchain startup, specializes in digital payments works with the largest banks across the globe to process cross-border payments in real-time. For Google, it could offer increased transparency, security, speed, and an alternative payment method.
When it comes to consumer trust, Apple wins hands down. Apple’s push into finance began with Apple Passbook launched in 2012 that allowed users to store boarding passes, movie tickets, coupons, and loyalty cards in one place. Passbook was later rebranded as Wallet in 2015. After testing the waters, the Cupertino consumer tech giant took the big plunge with Apple Pay in 2014, which put privacy at the heart of design. Apple Pay leverages the NFC-based payments method to enable transactions. In 2014, Apple came close to acquiring Illinois-headquartered Discover Financial Services for $37 billion, Bank Innovation reported.
Up next, Apple forayed deeper into consumer finance with its headline-grabbing credit card Apple Card launched in association with Goldman Sachs. Apple Card, launched last year is more than just a way to deepen relationships with customers — it’s a way to lock users in its vast ecosystem and gain a bigger share of the user’s wallet.
Here’s a Look at Apple’s Fintech Acquisitions:
- Xnor.ai: So far, Apple’s acquisitions have largely focused on upping its core line of product – iPhone but its most recent acquisition of edge AI startup Xnor.ai, that gives the tech behemoth access to light-weight algorithms can enable transactions without internet connectivity.
- Stampley: In 2019, Apple absorbed Italian API integration developer startup Stamplay for $5.678 million. Dubbed as the Lego for APIs by the co-founder, Stamplay gave Apple the much-needed heft to expand its digital payments services.
For a long time, Facebook had been looking for ways to break out of its core internet offerings and increase the stickiness of its platform with value-added services like mobile payments. Thanks to the 2.45 billion monthly customer base and the ubiquity of its platforms, FB is well-positioned to lead in the mobile payments space.
Unlike its peers, Facebook didn’t encroach into the bank’s traditional turf, instead, it doubled down on virtual currency to boost in-app purchases. Menlo Park-headquartered, one of the first consumer tech giants to throw its weight behind blockchain technology started by offering Facebook Credits, virtual currency in 2011. But as Facebook’s global footprint grew, it discontinued Credits in support of local currency.
Since then, the company has made significant inroads in blockchain and announced Libra — a digital currency, with a public launch planned this year. Along with Libra, Facebook also announced Calibra, a new digital wallet, built exclusively for Libra that will be available in WhatsApp, Messenger, and as a standalone app. Facebook Pay, launched in November 2019, is also available across FB’s mediums — Instagram, WhatsApp, Messenger, and Facebook.
Facebook shored up on the talent end to enter the financial domain. In 2014, Facebook poached PayPal executive David Marcus to expand Facebook’s Messenger product and bake mobile payments segment into it. Four years down the line, Marcus set up Facebook’s new blockchain team and co-created Libra, Facebook’s virtual currency and digital wallet Calibra.
Here’s a Look at Facebook’s Move Into Finance:
Chainspace: Facebook’s move into blockchain prompted it to acqui-hire team behind Chainspace, a smart contract blockchain platform. According to a Cheddar report, four researchers joined Facebook’s blockchain team. The report also noted that Facebook didn’t acquire any Chainspace technology but poached the original founding team behind Chainspace to strengthen its blockchain group.
There’s no other consumer tech giant as entrenched in financial services as Amazon. Amazon’s large ecosystem of e-commerce business allowed it to encroach further in the consumer’s lifestyle and gain stronger foothold in financial services. The e-commerce behemoth has a wide range of financial products to get customers to stay and spend more in their Amazon ecosystem.
Seattle tech giant first dipped its toes in finance with Amazon Pay, launched in 2007. Since then, Amazon Pay underwent many iterations and the flagship product now works as a digital wallet. Amazon stole a march over its peers by investing heavily in its payments infrastructure and branching out into three core services — lending, payments and insurance. The e-commerce giant which operates in 12 countries strengthened its financial play with strategic acquisitions like Bill Me Later, TextPayMe and GoPago to strengthen its team and product portfolio.
And in line with its vision to phase out the wallet is Amazon Go — Amazon’s cashierless store, which kickstarted the grab-and-go trend in 2018. Besides retail, Amazon Go also has a disruptive influence on the payments landscape and could potentially boost the usage of Amazon Pay. Today, there are 18 Amazon Go stores operating in Seattle, Chicago, San Francisco, and New York City.
Here’s a Look at Amazon’s Fintech Acquisitions:
- TextPayMe: Amazon acquired SMS Payments service startup in 2006 to boost its core product – Amazon Payments.
- Tapzo: In 2018, Amazon picked up personal assistant platform Tapzo to bolster the Amazon Pay team in India and help build the platform.
- GoPago: In 2013, the company invested in the cloud-based payment platform GoPago. As per reports, Amazon absorbed the technology and the engineering/product team of the California-based startup.
Is TechFin a Threat to Banks?
Big tech poses a big risk to financial institutions but analysts believe it is not the end of the game for banks. The march of big tech in finance spurred a digital transformation wave in the finance sector with banks and insurance providers stepping up the pedal on digital transformation initiative and setting up dedicated Centres of Excellence (CoE) to turbocharge innovation. In their quest to stave off competition, the incumbents joined forces with fintech startups and launched incubator programs to test and pilot emerging technologies.
Trends and Potential Drivers for Big Tech and Financial Institutions
- Why can’t big tech unseat banks? Big Tech can’t take the banking route yet because it has several regulatory challenges. However, by joining hands with banks and financial service providers and combining data, banks and tech giants can create more personalized products.
- Why can’t Big Tech be the next lender? Even though big tech has petabytes of customer data, what it lacks is credit history, and a necessary component for complex, underwriting decisions to become a mature lending platform. Additionally, tech companies lack the trust and maturity of banks to become lenders.
- Why is Big Tech going deeper into finance? According to a Bain analyst, Google’s ambitious announcement about opening a checking account in association with Citigroup and Stanford Federal Credit Union has got more to do with gaining granular customer data rather than going deeper into financial services.
Financial Institutions Strike Back
Financial services providers are not going down without a fight. If Big Tech spent 2019 acquiring AI startups, banks, insurance leaders and financial institutions responded by doubling down on digital initiatives, expanding the scope of in-house technology to earn consumer trust. Financial institutions topped the year with mega deals to build stronger financial technology infrastructure and nab the best talent. If Visa snagged Plaid to jumpstart other business models, such as consumer payments, lending, financial management, and banking & investing, its close rival Mastercard bet $3.2 billion on European payments company Nets.
The rise of digital in the financial domain saw banks and global payments providers investing in a robust cyber protection plan. Case in point, Mastercard acquired digital fraud protection solutions provider Toronto-headquartered Ethoca to prevent losses to digital fraud.
Note of Caution – Big Tech Comes Under Regulatory Scanner
Big Tech’s entry has sparked regulatory concerns with Bank for International Settlements (BIS), calling for a more comprehensive approach towards financial regulation, competition policy and data privacy regulation. In a report, titled Big Tech in finance: opportunities and risks, BIS noted big tech’s charge in finance, going beyond the regulatory boundaries, that has necessitated the need for mechanisms to among authorities and policymakers – national and international to expand the scope of regulation and control financial risks.
There’s no easy way to say it — as big tech makes inroads into consumer payments and credit lending, banks are faced with a big question on how to reposition themselves against the backdrop of fast-paced innovation. On the other end, big tech’s intrusion has drawn the attention of regulators who want to ensure a level playing field for financial institutions and large tech firms that have a wide user base. In a market dominated by so many players — banks, tech giants, and fintech startups, there won’t be one winner. Instead, we’ll see a partnership ecosystem with banks joining forces with large tech firms to deliver personalized products and services.
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