What keeps bank executives up at night? Is it the raft of neobanks entering the space? Or, more likely, is it the idea that an established tech titan might take aim at banking, and blow all rivals out of the water?
Facebook. Amazon. Apple. Google. All are global, and hold considerable cachet with consumers.
Amazon has gone from selling books to becoming an e-commerce juggernaut, offering everything from fresh groceries to video and music streaming, to cloud services and its own small business marketplace. Crucially, Amazon is now one of the biggest lenders to small businesses in the US, doling out more than $1.5bn in loans since 2017. Everything this Midas touches turns to gold; it is not unreasonable to think Jeff Bezos could wreak havoc with banking, and the company already offers co-branded credit cards with RBS, NatWest, aqua, and Vanquis.
PayPal is already a major player in payments, and recently joined forces with Barclays to enable customers to manage and use their Barclays and PayPal accounts together. PayPal is also major small business lender; 115,000 firms have borrowed $3bn from the payments giant since 2013.
And then there’s Apple, which is about to launch a new credit card with Goldman Sachs. If you were going to buy a new MacBook, and need a loan to do so, why wouldn’t you borrow straight from source? Google and Facebook, with 1bn and 2.2bn active users apiece, have ready-made user bases that could be turned on to a banking product with relative ease.
Does it make strategic sense for big tech to launch a bank account? In some ways, yes. It’s another way to reinforce their relationship with consumers, and to own another step in the value chain. Apple fanboys and fangirls already buy their lattes with a tap of their iPhone; why not store the cash in an associated account? By owning the bank account, you can also access data about how consumers are spending their money, which could inform future products and services.
According to Antony Jenkins, founder of 10x and former CEO of Barclays, technology firms that own swathes of data about consumers are in a great position to sell them financial products. “Every piece of information about you, from employment to education, healthcare to hobbies, social interactions and networks, even likes and dislikes… imagine the power of collecting all of that in one place,” he explains. “When that person wants a loan, you have a complete picture of the qualities of that person, their risk profile etc. This will enable the data holder to make a better decision and give more targeted pricing.”
There’s also the fact that listed companies need to demonstrate a clear path to growth in order to appease shareholders. Their share price rests on their ability to keep growing, and moving into new, profitable markets.
Besides these “push” factors, there are also “pull” factors to consider. People are unhappy with their bank accounts: they want a better customer experience, more tailored products, and a fairer system for accessing credit. This is why so many new banking entrants have joined the fray: the opportunity to disrupt the market is significant.
One of the biggest challenges faced by the neobanks is establishing trust with consumers. Yes, they are regulated and there are stringent capital requirements but not all consumers are aware that their money is protected in this way. When it comes to bridging the trust gap, the tech titans already have an advantage.
According to a survey of 2,000 Brits by business intelligence company RFi Group, the vast majority of 18–24-year-olds say they trust Amazon and PayPal more than the banks when it comes to protecting their personal data. But Facebook, tainted by the Cambridge Analytica scandal, was not so highly prized. Some 77pc of the people surveyed wouldn’t trust the social network with their data. The poll asked respondents whether they would welcome new financial services from the likes of Amazon, Google and PayPal and a whopping 73pc of millennials were keen.
Guillaume Pousaz, the founder of payments processing business Checkout.com, which works with the likes of Samsung and TransferWise, believes that Amazon is most likely to capitalise on its consumer loyalty. “In the US, half the population is on Amazon Prime,” he says. “It has created trust, and creates so much value for users. It could power third-party payments because of that trust. Few brands inspire that kind of loyalty.”
Lord Adair Turner, City grandee and banking expert, is less convinced. “I’m not sure tech giants like Google and Amazon would move into banking, although obviously they could,” he says. “We’ve seen for decades these new companies coming into banking with a customer franchise, but if you look at Tesco and Virgin, they are still quite peripheral in terms of scale. Is there something about tech companies that will achieve more than the others? We are clearly in an environment where a lot of banking is about technology. It’s a pure tech game. Just computers talking to each other. So why not?”
“I don’t think you’ll see a Google or Amazon bank,” comments Alex Letts, founder of U Account, the bank account for the under banked. “They will enable payments but they won’t become official banks. PayPal is different. It is already trying to launch a bank in the US. I anticipate PayPal struggling in Europe but making it in the UK. It will be revolutionary.”
These tech players have become hugely successful because they are in high-margin industries. Banking is unlikely to generate returns that are anywhere near their current rates.
However, there are a few reasons why the tech giants might shy away from banking. First of all, the capital requirements are arduous and it is unlikely that the likes of Google or Amazon will want to keep that much cash locked away. There is also the question of profit. These tech players have become hugely successful because they are in high-margin industries. Banking is unlikely to generate returns that are anywhere near their current rates. Pousaz states: “The problem with financial services, is that it’s a lot less profitable than, say, advertising. Look at the profits being made at Google or Facebook. Even Worldpay doesn’t make £1bn a year in this market but these giants are doing that every quarter.”
There is also the question of regulatory scrutiny. Companies like Google are already being accused of holding monopolies in specific markets. If they moved into banking, that attention would intensify. “They could attract attention from European regulators for becoming too powerful,” says Pousaz. “Google doesn’t want to draw attention to itself.”
You don’t actually have to be a bank to act like a bank. In the case of Amazon, which has created a lending product for its small business customers, it is able to offer credit without calling itself a bank. Bezos has already said he plans to expand this side of the business: “We hope to expand Amazon Lending and are now working on ways to partner with banks so they can use their expertise to take and manage the bulk of the credit risk.” By partnering with banks, Amazon offloads the regulatory headaches and can focus on customer service instead.
“You don’t need to be a bank to do that vast majority of what a bank does. Do I expect one of the major tech players to become a bank? No. Do I expect them to offer the same services as a bank? Yes.”
Conrad Ford, founder of Funding Options, the online marketplace for SME funding, says: “You don’t need to be a bank to do that vast majority of what a bank does. Do I expect one of the major tech players to become a bank? No. Do I expect them to offer the same services as a bank? Yes. Amazon has a formidable position — especially in the small business realm — to create an absolute game changer. It’s the main sales channel for many small businesses. Amazon is the financial hub of their business yet they end up working painfully with a very unhelpful bank that sees them as a low priority customer.
“The first move that Amazon will make is to get an open banking licence,” he continues. “At the moment Visa et al make huge margins from the cash flowing through Amazon. Amazon could go after the consumer but the opening point will be SME segment.”
Ford also believes that PayPal will follow the same path, starting with SMEs then opening up its pseudo-bank offering to consumers.
WeChat, also known as the “super app”, has become a consumer juggernaut in Asia, combining social networking capabilities with payments and other financial services. It boasts a billion active daily users across 25 countries. Tom Blomfield, founder of Monzo, the neobank, doesn’t believe he faces much competition from the likes of Google or Facebook but is watching China’s WeChat closely.
“It’s an interesting model,” he says. “A lot of people who didn’t have a bank account in China were able to suddenly get access to all these financial services on WeChat. As a model that’s super interesting. I don’t know whether it would play out the same way in Europe though.”
A spokesman for PayPal confirmed that a partnership with Barclays was going ahead but would not expand further. A spokesman for Amazon said that the company does not comment on future plans. Google did not respond to a request for comment.