Since the World Economic Forum sounded the alarm last August about the threat posed by major technology companies in financial services, Google, Apple, Facebook, and Amazon—known by the collective acronym GAFA—have become a growing concern among bankers. Recent news of Amazon’s interest in offering checking accounts in partnership with big banks has amplified that concern. Are “big techs” aiming to take a cut of the banking business? Do they want to become banks? How should bankers respond?
To better understand the big tech threat, bankers should first resist the generalization that “GAFA” companies introduce. Important distinctions inform each company’s potential threat to banks:
- Google is a search, services, advertising and platform company
- Apple’s strength is in hardware
- Facebook is a social media network
- Amazon is an e-commerce, services and platform company
While all four companies want to drive revenue by expanding their core businesses into new markets, each addresses finance from different directions. Accordingly, each presents different disruptive potential. For instance, though Apple Pay P2P and Apple Pay Cash can displace bank deposits, hardware remains Apple’s focus. As such, Apple presents less of a threat to banks than Amazon’s ever-growing platform replete with payments, lending, cash deposits, credit cards and member rewards.
Bankers should also examine big tech motivations: that is, who do they compete against?
In a word: “ChinaTechs.”
Alibaba, Tencent and JD.com (JD) top the list. These Chinese companies present a major threat to Amazon in particular. Over the next two years, Alibaba is on track to surpass Amazon Web Services (AWS) as the world’s top cloud-computing-services firm—a high-margin business. Alibaba also competes head to head with Amazon globally in online retail. Tencent, the developer of WeChat, is Facebook’s primary rival.
JD, also known as Jingdong (or 360buy), is the world's fourth-largest internet company by revenue. JD provides the most sophisticated phone-to-door logistics network in the world and partners with e-commerce companies and social media players such as WeChat (Tencent) to deliver unique buying experiences: deeply social in nature and including built-in lending and payments functionality.
The ChinaTech model integrates the social, retail and financial realms. Imagine finding a watch you like on Instagram, buying it with one click (or financing it with a 90-day consumer loan), and having it delivered to your door the next day. This experience currently exists in China, and both JD and Alibaba have announced plans to come to the U.S. this year.
This is why Google, Facebook, Amazon and Walmart all have big plans to integrate banking and finance. They aren’t interested in becoming banks; they’re defending against international competitive threats.
A question of distribution
The second dimension to the inbound threat from China stems from distribution: Alibaba, Tencent and JD are buying and/or partnering with as many brick-and-mortar entities as they can, including Walmart China. Longtime player in finance and payments, Walmart considers Amazon its biggest threat. Thus, a partnership with the ecommerce and distribution power of JD would help Walmart better compete against Amazon in the U.S.
ChinaTechs build their competitive edge on the four-legged stool of ecommerce, social media, finance/banking, and brick-and-mortar logistics.
Banks compete in a trans-local environment; no matter how close your customers are geographically, big techs in a global struggle influence them. It’s crucial to anticipate and control the nature and extent of that influence. If Amazon et al enter financial services via big bank partnerships (such as through Amazon’s lending and checking-account plays with Bank of America and Chase, respectively), they can avoid regulation, own the customer experience and better compete against ChinaTechs.
And if Amazon, Google, Facebook, Walmart and perhaps Apple expand their platforms to become de facto marketplaces for financial products and services, they may gain control of the distribution—and therefore the positioning—of those products and services. If so, bank products and services will become utterly commoditized, rewarding the lowest-cost providers (major banks) and edging out community and regional institutions that serve as the backbone for much of our economy.
Whether big tech uses partnerships or expands platforms to integrate financial services, the threat is real.
An answer in four parts
But all is not lost. Community and regional banks can defend and differentiate themselves against encroachment by strategically anticipating and countering big tech’s modes and methods of attack.
First, banks must leverage real-time payments to counter their displacement of deposits by way of P2P services such as Venmo, Apple Pay Cash, and Square Cash. Think Zelle but socialized and with radically simplified onboarding. Ubiquity (the ability to pay anyone at any financial institution) will grow just as important as speed. Failing to facilitate payments between “out-of-network” financial institutions won’t cut it competitively.
Second, banks must attack big techs where they remain weakest. Ever tried to call Google, Facebook or Square when you have a problem? By humanizing digital banking with live, personal, conversational support at the limits of self-service, community and regional banks can differentiate themselves against fully automated models.
Third, banks must pool their data (as they have in the fraud fight) to leverage behavioral analytics that anticipate, expedite and personalize the most mundane of inquiries. Pooling data is a systemic endeavor that will require the help of banks’ biggest technology partners and providers. Pooled data will also help train the machine learning algorithms needed for hybrid applications of chatbots to automate the most routine of interactions.
Finally, banks must seek out platforms open enough to enable agility and “fintegration” with fintechs of choice and other third-parties. In this way, they can strategically and materially differentiate themselves, though these platforms must also protect and improve the bank’s control of distribution, data and user experience. Anything less creates openings for companies like PayPal and Square. Segment platforms and vendors of many stripes will vie to provide bank-friendly platforms for community and regional institutions.
Putting it all together: From anxiety to opportunity
By better understanding the motivation, modes and methods of threats to the big techs, banks have a unique opening to differentiate and thrive. Since big techs don’t want to be banks, bankers don’t have to compete head-to-head.
But because big techs must integrate banking services into their ecosystems to meet international threats, banks must watch that evolution and be strategic about the opportunities it presents. Specifically, banks should consider giving big techs what they need and want—but on the banks’ terms and with differentiated products and services that counter commoditization, stem deposit displacement, and extend banks’ reach into big tech ecosystems and platforms.
To succeed, banks must push their vendors to innovate the tools and platforms to compete. And banks are well-positioned to fend off the big tech threat by leveraging their most conspicuous strength inside the digital channel: live, personal support at the limits of self service. That sort of relational strength and value can’t be bought on any ecommerce platform.
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Lee Wetherington is director of strategic insight, Jack Henry & Associates, Inc.