Why Big Tech Firms Want A Piece Of Finance
Every once in a while i encounter such headlines during my research:
- Tech giants in financial services
- THE TECH COMPANIES IN PAYMENTS REPORT: How technology giants are using their reach and digital prowess to take on traditional banks
- Big tech firms like Amazon are eager to eat the banking industry’s lunch
- Every Tech Company Wants to Be a Bank — Someday, At Least
- Why WhatsApp’s entry into payment arena could change Indian banking forever
- Facebook Libra Global Cryptocurrency
But i usually dont take that much interest in them, well until Yesterday January 16th 2020 at 3pm.
I was just going through my YouTube Feed and encountered this Video by The Wall Street Journal
In 2019, many large tech firms announced plans to offer financial products and services. WSJ’s Liz Hoffman explains why Google, Apple, and others are offering products that might someday replace your wallet.
Let’s take a look at why tech firms are going into finance.
As headlines like “Amazon Is Secretly Becoming a Bank” and “Google Wants to Be a Bank Now” increasingly crop up in the news, tech giants are coming into the spotlight as the next potential payments disruptors.
And with these firms’ broad reach and hefty resources, the possibility that they’ll descend on financial services is a hard narrative to shy away from. To mitigate potential losses under this scenario, traditional players will have to grasp not only the level of the threat, but also which segments of the financial industry are most at risk of disruption.
Others are already getting into partnerships with big tech to ensure their survival in Finance.
Google, Apple, Facebook, Amazon, and Microsoft, collectively known as GAFAM, are already active investors in the payments industry, and they’re slowly encroaching on legacy providers’ core offerings. Each of these five companies has introduced features and offerings that have the potential to disrupt specific parts of the banking system. And we expect a plethora of additional offerings to hit the market as these companies look to build out their ecosystems.
However, it remains unlikely that any of these firms will become full-blown banks or entirely upend incumbents, due to regulatory barriers and the entrenched positions of big banks. Moreover, consumers still trust traditional firms first and foremost with their financial data. That means these companies are far more likely to rattle the cages of incumbents than they are to cause their total demise. That said, these companies have a proven capacity to revolutionize industries, making their entry into payments critical to watch for legacy players, especially as their moves demonstrate an intent to be a disruptive force in the industry.
The biggest technology players are eroding the boundaries between industries “as they seek to be all things to all people,” according to the McKinsey report. The biggest Asian tech firms show why banks should be worried: Rakuten, Japan’s largest online retail marketplace, runs one of the country’s largest online travel portals and its messaging app (which can suggest shopping items based on your recent chats) has about 800 million users. The company also issues credit cards and offers mortgages and securities services. China’s Alibaba is another big e-commerce company that also does brisk business as an asset manager, lender, and payments firm.
Tech companies are breaking into finance more slowly in the West, but it’s happening. Amazon now provides loans for small and medium-sized companies. Facebook is integrating person-to-person PayPal payments into its messenger app, and Apple will allow iMessage users to send cash to each other.
McKinsey describes the biggest risks for banks as the ”four horsemen of the e-pocalypse.” That includes disintermediation, where financial firms are cut off from their customers by an upstart like Lending Club. Perhaps a bigger concern is that their businesses gets unbundled; right now they might lose money on checking accounts, but make the money back (and then some) when customers return to the bank for mortgages. That could be difficult to sustain if everything is routed through a messaging platform that banks don’t control. This leads to the two other big risks, of being left to compete solely on low-margin, commodified services and, ultimately, “losing brand awareness and becoming invisible as consumers can access financial services without knowing the brand,” McKinsey notes.
Here are examples of Big Tech Entering the Finance Industry
- Amazon Web Services (AWS), which provides services to dozens of finance companies, including Aon, Capital One, Carlyle, Nasdaq, Pacific Life and Stripe
- Brazil’s Banco Bradesco Facebook app, which allows customers to conduct day-to-day banking from Facebook, relying on the social network’s customer data analytics to target users
- Capital One and Liberty Mutual’s “Alexa” solution (a voice-activated personal assistant), which allows customers to check balances, pay bills and track spending through these devices
- WhatsApp rolled out its payments feature to select users across India to much enthusiasm this week, providing a strong boost to India’s digital payments ecosystem. But that didn’t almost happen because of the company’s foreign origin. Turns out, this was WhatsApp’s second endeavor to enter India’s payments market.
Planned Big Tech Entrances
- On Wednesday, Google confirmed reports that it would begin offering checking accounts next year, the latest in a recent volley of tech ventures targeting consumer finance.
- Uber, under the moniker Uber Money, wants to be a bank for its drivers (and maybe riders too).
- Facebook just announced Facebook Pay — Venmo basically, except Facebook gets all the transaction data for ads. (Not to mention Libra, its attempt to build a global cryptocurrency payments network.)
- Amazon, like Google, has reportedly explored checking accounts of its own.
While Facebook, Amazon or Google are unlikely to open a banking division in the immediate future, the impact that such companies are having on the industry is beginning to show.
Apple Pay was first introduced in 2014 and allowed people to use an iPhone in the same way you would a tap-and-go bankcard. Samsung introduced a similar system a year later.
This technology struck a sour note with banks in Australia, and in 2016, several of Australia’s largest banks — the Commonwealth Bank, Westpac, National Australia Bank and the Bendigo and Adelaide Banks — submitted a request to the Australian Competition and Consumer Commission (ACCC) to allow them to collectively bargain with Apple.
Specifically, the banks wanted to gain access to the Near Field Communication antenna in iPhones so that they could create their own competing digital wallets.
Apple firmly fought the claims. “Authorisation of a cartel among the applicant banks who control access to two thirds of all cardholders in Australia would result in significant consumer harm and perpetuate the oligopolistic banking market conditions,” Apple’s submission to the ACCC read. In March 2017, the ACCC took Apple’s side and ordered each of the banks to negotiate with Apple separately.
While it conceded that a collective agreement would place the banks in a strong position to negotiate with Apple, it ultimately ruled that such a situation would leave Apple at a distinct disadvantage to its competitors. The ACCC added that it would also benefit customers, as a digital wallet attached to a specific bank creates a disincentive for switching banks.
Amazon has also been flirting with the idea of entering the financial services market. The e-commerce giant launched Top Up in the UK at the end of August this year, a service that allows customers to transfer cash directly to their Amazon account through PayPoint outlets. Previously, in July, it had launched a similar service in the US called Amazon Cash.
Both services allow the company to access the small portion of consumers that do not have debit or credit cards. While money loaded onto Top Up and Cash can’t be withdrawn, the services are a step towards a traditional bank account.
Amazon’s foray into small business lending aligns it closer still with traditional financial institutions. Since 2011, the company has been looking at the data generated by small businesses that use Amazon Marketplace. The data allows Amazon to identify candidates for loans ranging in size from $1,000 to $75,000.
So far, the system appears to have been successful: Amazon reported it has issued $1bn in loans to 20,000 small businesses over the past 12 months, with more than half of the businesses agreeing to a second loan.
Amazon Marketplace affords the company an insight into businesses that banks are unable to gain, and so it is no surprise that Amazon’s lending experiment has been a success. This insight, combined with a strong incentive to help businesses that use its services, means that Amazon is in a natural position to confidently issue loans.
However, there is one major barrier that may stop Silicon Valley from pivoting to banking: acting as a bank also means being regulated as a bank. This presents myriad difficulties that may distract from the areas businesses lead in.
China may offer a glimpse of what’s to come. Fintech company Alibaba’s affiliate Alipay overtook PayPal to become the world’s largest mobile payments platform in 2014. Meanwhile, digital giant Tencent is offering a range of financial services through its WeChat messaging software.
Although it seems unlikely that technology companies in the rest of the world will soon be letting people open a current account, the gradual merging of technology and finance is inevitable.
- Technology giants from Google to Apple are looking to take on the financial services industry.
- Last year, Apple debuted its credit card; in 2020, Google is set to launch consumer bank accounts.
- But Big Tech companies share one thing in common: they don’t want to be regulated like banks.
Data is truly becoming more expensive than Gold. The amount of data these companies can collect thanks to their entrance into the financial industry is huge. Just recently they wanted your medical records now this.
Anyway guy’s that’s it for today. I would like to thank my sources. Find links to the the articles i used for this post down below.
SOURCES & READING LIST BASED ON TOPIC FOR MORE INFO