Banks, Fintech and GAFA
The relationship between banks and Fintech has often been an uneasy one. Traditional banks usually have old core systems which are often incompatible with Fintech applications. Platforms based on blockchain technology are not only difficult to implement but also create regulatory uncertainty that most banks are keen to avoid. Large banks do, however, have a large customer base. Bank of America, for example, has over 60 million corporate and private clients worldwide and this number is probably dwarfed by the largest Chinese banks.
Fintech companies, on the other hand, might have cutting edge technology but lack the client base of most banks. There are notable exceptions, particularly in the payments space, such as Ant Financial or Transferwise. Such companies may be able to count their clients in the millions but most of the companies in the sector struggle to reach the tens of thousands. In Europe, there are two interesting exceptions by way of fully fledged digital banks who have managed to combine a blockchain based platform with a significant client base. N26 was established in Germany in 2013 and now has about 3.5m customers. Revolut was founded two years later in the UK and has an astounding 8 million customers.
Interestingly, N26 launched in the US last year with a partner bank and Revolut has also recently announced a partnership with Mastercard in the US. If they can duplicate the success that they’ve had in Europe over there, these two companies will become real threats to the traditional banks. However, such examples are rare and most Fintechs are happy just to chisel away to obtain a small market share in a specific activity (payments, compliance, insurance…). The future of these smaller companies is less certain and increasingly involves working in partnership with the banks they originally competed with.
One of the most innovative global banks is BBVA and it’s instructive to look at their relationship with technology and Fintech. Carlos Torres Vila, the Executive Chairman of the bank, was until recently the CEO. He joined the bank as director of corporate strategy before becoming digital banking director in 2014. The fact that someone in this position was appointed CEO shows the importance that the bank placed on technology and illustrates how this Spanish bank has been one of the pioneers in Fintech. Indeed, they established their own in-house technology arm, BBVA Ventures, in 2013. Whilst the activity was small, it illustrates how BBVA was ahead of the curve compared to most other global banks.
But BBVA Ventures was closed three years later and spun off into Propel Venture Partners, an independent company operating out of San Francisco, even if it was helped by an initial injection of $250m of capital by the ex-parent. This shows their recognition that the skill sets necessary to succeed in a technology company are very different to those needed in a bank. Not only is there a generational issue but also fundamentally different ways in which the talent must be nurtured and managed. In other words, Fintech companies can succeed in partnership with banks (BBVA is a limited partner in Propel Venture Partners) but probably not as subsidiaries or integrated entities.
Most banks seem to have recognised this and, in the last few years, the large global banks have been significant investors in the Fintech sector. The objective is now more to integrate certain technologies into their platform on a white label basis to offer the service to their existing client base. This symbiotic relationship is a proverbial “win win”, especially since the banks in general tend not to get involved in the day to day management of the company they acquire. How this relationship will evolve in the future, though, remains to be seen. Majority shareholders often make the mistake of strangling the goose that lays the golden eggs once the eggs reach a certain size.
More recently, new actors have started to test the water of the financial services sector and could have an impact far greater than that of the Fintech start-ups. The client base of these actors does not represent a few million but rather a few hundred million or even several billion. Their financial clout is greater than that of many countries and technology is at the very core of their success. I’m of course talking about the large technology groups, commonly known as the Gang of Four or GAFA (Google, Amazon, Facebook and Apple). These companies have operated their own payment systems for some time. Amazon Pay was launched in 2013, Apple Pay a year later and Google Pay two years ago. More recently Facebook has been experimenting with the idea of launching its own crypto-currency. If we extend the acronym to include Chinese internet giants, Alipay and WeChat Pay already have over a billion active users.
However, the real threat to the banks will come if one of these companies decides to set up a fully licenced bank. Google is already providing instant loans in India in partnership with local banks. Facebook is distributing banking services in Africa, again in partnership with local banks. Apple have launched their own payment card in partnership with Goldman Sachs and Mastercard. But what if the phrase “in partnership with” disappears and Amazon, for example, decides to use its amazing technology and huge customer base to compete head on with global banks? What if banking services were “Uberised” to become just another commodity offered online?
Banking is obviously a highly regulated sector and selling an investment fund is not the same as selling a pair of shoes. However, in this era of “fake news” and media manipulation, it seems obvious that Internet will become increasingly regulated and that GAFA and similar entities will have to spend more on internal controls and compliance. Equally, many banking services have already become commoditised. Most young people make payments to their peers using non-banking applications. To a lesser extent, older generations use online trading platforms and robo advisors to buy investments. As regulations increase for technology companies and as margins continue to be squeezed for traditional banks, it would seem logical for at least one of the Gang of Four to make the leap into fully-fledged financial services.
Banks are obviously aware of this threat but the speed at which they can react is limited by their legacy systems and traditional conservatism. One interesting counter example is JP Morgan in Singapore. In 2016, the Monetary Authority of Singapore introduced Project Ubin with the objective of using blockchain technology for clearing and the settlement of payments and securities. The project was developed in partnership with JP Morgan and the sovereign fund Temasek. The most recent phase has seen the testing of the technology in 40 local financial and non-financial institutions. If the trials are successful, it will be the first real example of wide-scale use of Fintech technology in a fully regulated environment. It might also be a long-awaited response to an imminent threat.