Are Big Tech Startups Becoming Big Tech Banks?
The Startup FinTech Revolution
During the last decade, fintech startups such as Starling and Revolut have been considered a serious threat to traditional banks. This is because you no longer have to reach for your wallet or visit the bank to make transactions. Transactions can now be completed online with just a click of a button – and you’re good to go!
In recent years, Big Tech firms are seen rolling into finance, a highly profitable space. While some of them begin to acquire fintech startups, others are integrating the core features of modern banking into their platforms, thus having a disruptive impact on the already competitive financial industry.
A report by World Economic Forum (WEF) reveals that tech giants such as Amazon, Google, Facebook, and Apple pose a greater threat to the underlying business models of traditional banks than the more diverse fintech sector, having acquired deeper experience that makes it difficult for traditional financial institutions to catch up with them.
The Big Tech Players Threat to Traditional Finance
Today, Amazon has diversified from an online bookstore and is believed to be hatching plans to introduce what could be regarded as ‘The Bank of Amazon.’ This is evident from its integration of deposits, loans, credit cards, among other modern banking features and services on Amazon Protect, which will ultimately increase the number of merchants and customers within its ecosystem.
Apart from this, it also lends money to small and medium-sized businesses (SMBs) via Amazon Lending. In 2020, Amazon partnered with Marcus, Goldman Sachs’ online consumer bank to grant up to $1 million in loans to SMBs that are domiciled in the United States. To determine loan approvals, Goldman Sachs will utilize data obtained from Amazon’s business revenue and tenure.
Apple is also following a similar path. It launched the Apple Card Family feature, which allows at least two people to co-own an Apple Card account, manage the account together, as well as build credit as equals. With the new feature, parents would be able to share cards with their kids (aged 13 and above) as well as set spending limits for them. This Card can be used anywhere by any of the family members added to it.
In 2020, Apple acquired Mobeewave, a Canada-based payments startup that allows users to process payments by simply tapping their credit cards on another phone. It could be referred to as a contactless payment platform with Tap to Pay feature. Earlier this year, Apple also acquired Credit Kudos, a UK-based open banking startup that offers insights that help banks and lenders to make faster decisions with lesser risk.
Google also announced a partnership with Shopify, a Canada-based multinational e-commerce company. With the partnership, merchants will be able to feature their products across the search engine on Search, Maps, YouTube, Images, and Lens. With this, customers would no longer have to search for e-commerce platforms using Google. Rather, they would be able to find and buy products on the search engine itself.
Though Google also has its bank account product, it considered shuttering it two years later. The basis of the shutter was to avoid competing with banks. Instead, it decided to develop a digital payments ecosystem that will enable banks to provide financial services that include more secure ways of making online purchases such as through single-use tokens or virtual cards.
Facebook, in its bid to consolidate payment strategies across its various platforms including Messenger, Instagram, and WhatsApp, launched Facebook Financial (F2). This fintech project also includes Facebook Pay, a secure payment system that allows users to make purchases and donate money without leaving the Facebook or Instagram apps. In addition, WhatsApp started a P2P money transfer service.
The move to implement a payment project by Facebook was motivated by the numerous commercial tools running around the social app and the need to optimize its payout strategy. Ultimately, the integration of payment and commercialization features will increase the time users spend on the social networks under Facebook.
Alibaba’s journey into payments and finance could be traced to the steady increase in the platform’s transaction volume. Thus, it created Alipay as a payment gateway. Subsequently, Ant Financial was created to support the financial infrastructure. In 2017, Ant processed a whopping $8 trillion in transactions. Today, Ant has expanded its services to include assets management, insurance, and loans.
Big Tech Players Impact in FinTech
According to a CB Insights report, the investment of big tech in FinTech companies totaled $2.2 billion in 2021. Factors that played into Big Tech’s hands are not unconnected with the move toward a cashless economy where money could be sent and received via smartphones, without even having to log into a bank account. Of course, these advances are being enabled and driven by technology – and not the banks.
Another factor is the role user experience plays in helping customers make certain decisions online. Tech giants are known to provide a frictionless customer experience by making sure customers enjoy every part of their online journey. They leverage artificial intelligence (AI), machine learning (ML), and data analytics to gain and analyze data and insights that will enable them to make financial product recommendations that suit customers.
Big Tech firms are known to be agile and innovative. Unlike fintech startups, they possess a global customer base and do not require banks’ capital to be able to operate within the financial sector effectively. Also, as consumers continue to demand smart payment solutions, Big Tech firms are quick to respond to the trend and match the needs.
Thus, as banking is becoming increasingly digitalized and big tech firms are breaking into the financial industry, especially through acquisitions and partnerships, we can deduce that Amazon, Apple, Facebook, Google, Alibaba, and other Big Tech firms pose a serious threat to almost all the financial institutions, including the large ones.
In fact, they are well positioned to even dominate the financial industry, given their vast swaths of data and huge loyal customers. Despite having immense customer data as well, most financial institutions might not be able to utilize it as effectively as the big tech firms. Therefore, traditional banks might have no better option than to partner with such Big Tech firms to enjoy mutual benefits.
The big questions that come to mind:
- how the Finance industry is looking at the Big Tech players and their impact into the overall Industry? Is an opportunity to grow the economy?
- Are Big Tech companies posing a threat to Traditional Finance? And what about FinTech companies?
- Are Financial institutions and FinTech startups willing to move their critical workloads into the Big Tech’s clouds when they are offering competitive products?
Exciting times ahead for sure.
References
https://www.cbinsights.com/reports/CB-Insights_Big-Tech-In-Fintech.pdf