21 November 2019

The Economist: Big Tech takes aim at the low-profit retail-banking industry

Yet the hype conceals rising nervousness among the fintech participants. Each of the so-called GAFA quartet is making moves. Amazon introduced a credit card for underbanked shoppers in June; Apple launched its own credit card in August. Facebook announced a new payments system on November 12th.

Individually, each initiative is relatively minor, says Antony Jenkins, a former boss of Barclays, a bank, now at 10x, a fintech firm. But together they mark the acceleration of a trend that could reshape the finance industry.

The GAFAs have long had an interest in finance. Yet until recently they focused on payments, each in its own way. What these systems share is their limited success. This contrasts with the explosive growth of WeChat Pay and Alipay, China’s “super-apps”. These allow shoppers to pay for nearly anything, from tea to taxis, by scanning a QR code. Launched in 2013, they have over a billion users each. They process transactions worth a third of China’s consumption spending and are now big lenders in their own right.

Since the financial crisis, credit provision has become one of the world’s most regulated activities. That constrains returns on capital and profits. Western lenders’ valuations are a fraction of tech firms’, notes Sankar Krishnan of Capgemini, a consultancy. Why would Big Tech want to be a bank?

The answer is twofold. The tech giants may not yet know exactly what they want, says Martin Threakall of Modulr, a fintech. Silicon Valley likes to place bets and see what sticks. And they probably do not actually want to be banks—as long as consumers do not notice.

At bottom, a bank is a balance-sheet, a factory that turns capital into financial products (eg, loans and mortgages) and a sales force, says Dave Birch of Consult Hyperion, a consultancy. The first two are heavily regulated, and Big Tech is uninterested. That is why the giants have turned to banks to do the tedious bits. Apple’s card is issued by Goldman Sachs, and Amazon’s ones by Chase, Synchrony and American Express. Google’s accounts are backed by Citi and a banking union.

Rather, the tech giants covet distribution. Their smarter systems and lack of branches should enable them to strip costs out, says Tara Reeves of OMERS Ventures, the venture-capital arm of a Canadian pension fund. More important, selling banking products should lead more people to use their payment systems. Apple and Google want one more reason for consumers to “keep their phone under the pillow at night”, says Lisa Ellis of MoffettNathanson, a research firm. Amazon wants payments in-house so users never leave its app.

But above all, the GAFAs want data. They are already good at inferring consumers’ preferences from browsing patterns and location. But spending patterns are more useful. They could be used to assess ads’ performance or promote products. An investor says tech giants could even start dispensing financial advice.

Regulators have so far seen new entrants in financial services as a welcome catalyst for the innovation banks have failed to foster. That could change if the giants charge in. At the Web Summit Margrethe Vestager, the European Union’s competition commissioner and a GAFA sceptic, mused about the risks to democracy if tech firms become too powerful to oversee and regulate. “We can reach for the potential,” she told the amped-up audience in Lisbon. “But we can also do something to control the dark sides.”

Full article on The Economist

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