Are Big Techs threatening the role of banks in retail?

In the last 18 months, Google, Apple and Facebook have entered the consumer banking space with a firm step, marking a de-facto turning point for the financial services industry. Far from being a black-and-white situation, these initiatives are generating new operating models and synergies that could represent both an opportunity and a challenge for banks. While the role of banks in retail will probably change, they should start thinking strategically about their next move and investments.

The threat represented by Big Techs entering the financial services industry and directly competing with banks has been looming for quite some time.

Only a few months ago, we discussed Facebook’s major investment in the Indian company Reliance Jio Platforms – a move that will eventually allow Facebook to extend their payment services and navigate India’s regulatory landscape more easily.

More recently, at the beginning of August, Google announced their partnership with 8 US banks to launch mobile-first bank accounts available through Google Pay in 2021. The primary goal is to provide consumers with financial insights and budgeting tools, embedded in a great user experience and backed by the security of a bank. Google has been collaborating with Citi and SFCU (Stanford Federal Credit Union) on this proposition since 2020. However, BMO (Bank of Montreal) Harris, BBVA (Banco Bilbao Vizcaya Argentaria), Coastal Community Bank, First Independence Bank, and SEFCU (State Employees Federal Credit Union) have now decided to get onboard. The details of the proposal, along with the exact contribution of each party, have not yet been disclosed.

So, what does this mean for banks? Should banks consider the Big Techs as threats or as potential partners helping them to better serve their customers?

Big techs and financial services: how it works

Before getting to the core of matter, we need to outline an important premise. Most of the initiatives led by Google, Amazon, Apple and other challengers are not actually undertaken by the Big Techs on their own, but rather in collaboration with – drum roll – banks. Only Facebook decided to launch its WhatsApp digital payment service without any official banking partners. As a result, though, the company has faced major regulatory hurdles and even put their initiative in Brazil on hold.

Partnering with financial institutions to enter the financial services industry seems to be the only model that works. Joining forces with banks, the tech giants can focus on what they do best – such as user experience and data management – and let the banks handle the complexity of payments and regulations. Finally, the Big Techs build on their existing reach to maximise their impact.

In short, both banks and Big Techs are keeping their friends close…but their enemies closer. Instead of competing directly against each other, they are partnering up to explore new opportunities. What’s the threat for banks, then?

Big Techs are redefining the role of banks in retail

Until now, Big Techs have shown no interest in becoming more regulated to attract deposits. As such, they have not been as much of a threat as they could have been for banks. However, the Big Techs’ foray into payments has major repercussions, particularly when it comes to the role of banks in retail.

Like many Fintechs, Big Techs are interested in payments data, the best source of information to get customer behaviour insights. To this end, they have been very active in the payment initiation space, through wallets and cards, and have impacted banks’ balance sheets by reducing their interchange revenues.

By proposing extra services, their impact is about to grow making the competition fiercer than ever before. So, what should banks do? A strategic response could be to move into a different space.

Nowadays, only a few banks operate in the Banking as a Service field, providing banking services to non-bank regulated entities launching financial products. The revenue opportunities in this space are estimated to be $3.6 trillion by 2030*. Banks could jump on this next opportunity. However, to be able to operate in this field, financial institutions must have a strong, open, and modular payments infrastructure. Many banks are not there yet. Recently Form3, the cloud-native payment technology provider for banks and regulated Fintechs, has raised $33 million in strategic investment from Lloyds Banking Group, Nationwide Building Society and venture capital firm 83North. This tells us that significant modernization is coming in the banking space.

So, watch out! The next few months will probably define the next two to five years in this part of the industry.