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01. 11. 2018

Tech giants in banking: will Amazon launch a bank?

Will US platform firms follow in the footsteps of their Chinese peers and start banking services very soon?

Amazon enters banking

Threat from US technology giants, such as Google, Apple, Facebook and Amazon (aka GAFA), has been long looming over traditional banks. In fact, most bank executives fear that it’s now a question of when, not if, they will launch actual banking services. According to a survey by Marketforce, as many as 83% of senior bankers expect Amazon to enter mainstream banking within a decade. But 66% believe this will happen within the next five years.

Changing customer behaviour has also been fuelling fears about Amazon and Facebook moving into mainstream banking. Clients rank certain technology firms almost as high as traditional banks for trustworthiness and they are “surprisingly amenable” to trying financial products offered by tech giants, a survey by Bain & Company reveals. Younger customers are the most willing to give these products a go, and interest is the greatest where digital banking services are scarce.

Tech giants already look like banks

Make no mistake: GAFA conglomerates are already pretty active in financial services. They first got a foothold in payments. Google offers peer-to-peer payments with Google Wallet and in-app payments through Android Pay. Apple allows customers to use their iPhones as a bank card and Facebook runs a peer-to-peer payment system via Messenger. And Amazon Pay lets users make payments online and now even in-store for pre-ordered products at selected retailers.

But GAFA’s expansion doesn’t stop here. Google has been testing Purchases on Google that enables users to buy products directly from mobile search ads with their linked Google Wallet. Facebook has teamed up with Transferwise and is now providing international money transfers. On top of this, it secured an e-money license in Ireland at the end of 2016, paving the way for payment services in European markets.

Amazon does already look like a bank with different financial products. It’s rolled out Amazon Cash, which allows customers to add cash to their Amazon accounts and top it up at selected brick-and-mortar stores. These clients can also earn rewards on purchases, effectively making Amazon Cash a banking account. In addition to payments and deposits, Amazon also offers small short-term loans to its sellers to fund their inventory purchases.

Will 2018 be the year of an Amazon bank?

US tech firms are eyeing a bigger slice of the financial services sector pie this year, Bloomberg reports, asking if 2018 will be “the year of the Bank of Amazon”. CFRA banking analyst Ken Leon predicts that Amazon may lay its hands on a small or mid-size bank in 2018 to get a footing in the industry.

“This may either be a tactical move or a broad strategic jump into banking, as Amazon seeks more stickiness with consumers and small businesses in consumer lending such as auto loans, credit cards and home mortgages,” Leon says.

But others doubt the tech giant will buy a bank as financial services is just a means to an end for Amazon: making more money by selling more things. Its main competition remains other retailers, not banks, Tearsheet says. They cite Forrester principal analyst Alyson Clarke, who believes Amazon offers cards and payments only to help customers get their goods faster.

GAFA could follow the Chinese example

On the other side of the globe, tech firms are already moving into banking, setting  an example for the GAFA group. “The tech behemoths have been slow-ish but that’s changing quickly driven largely by Chinese chat/payments envy. Facebook and Apple and others will double down on trying to replicate this in the US,” Jeremy Philips, a partner at Spark Capital, told Bloomberg.

Banks in the US have all the reasons to worry about the financial foray of Asian internet and e-commerce firms like Baidu, Alibaba and Tencent (often referred to as the BAT group):

  • Baidu won approval in August 2017 for its joint venture with Citic Bank to launch aiBank, an AI-powered online bank. It shows what Google could do in banking, “if it were to be so minded”, Marketforce says.
  • Alibaba created Ant Financial, which runs the Alipay payment platform and manages Yu’e Bao, the world’s biggest money-market fund. It also established online bank MYbank and has been trying to acquire US money transfer company MoneyGram.
  • Tencent’s WeChat money transfer service is set to become a major contender in the international payments sector by 2021, together with Alipay and Chinese bank cards provider UnionPay, according to Juniper.

But let’s not forget that BAT’s success so far has largely depended on the relaxed regulatory environment in China. GAFA’s core markets typically have tighter banking regulations and an existing consumer finance ecosystem, Citi Research argues. Google and Amazon are more likely to introduce “regulatory-light” fintech services to enhance their existing products. And the odds are that they will distribute third-party financial products rather than “manufacture product themselves”.

Bigger threat to banks post PSD2

In any case, the threat from tech giants to traditional banks will now become bigger than ever before. January 13, 2018 marked the introduction of the EU’s revised Payment Services Directive (PSD2), requiring banks to open their customer data to third parties via application programming interfaces (APIs). Simply put, this allows non-banking firms to launch financial products using data currently guarded by banks.

No doubt that GAFA giants will jump on this opportunity. Quite possibly all four tech titans will set up as a Payment Initiation Service Provider (PISPs) so that they can handle their own payment processing and sidestep the fees they currently pay to card acquirers, Marketforce predicts.

What’s more, GAFA firms can also register as Account Information Service Providers (AISPs). This would let them use open APIs to tap banking data and launch portals that help customers access all their banking accounts in one place.

The bad news for banks is that Amazon, Facebook, Google and Apple are not going anywhere. They all have a large number of users, huge databases, a strong brand and technology know-how “to leverage all of this into the kind of innovative propositions of which customers just can’t get enough. Quite simply, a bank that isn’t worried is one that hasn’t fully understood the threat,” Marketforce says.

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