If there’s anything incumbents and neobanks can – and probably should – bond over, it’s the increasing competition they both face from big tech companies. Over the last couple of years, Google, Apple, Facebook and Amazon (aka GAFA), plus Asian internet and e-commerce giants like Baidu, Alibaba and Tencent (BAT) have made rapid progress in digital financial services. Let’s do a quick recap first, shall we?

Amazon, for starters, extended $3 billion in capital to 20,000 businesses in the US, the UK and Japan between 2011 to June 2017. Alibaba was busy issuing small business loans of about $63.4 billion in 2017, equalling 30% of the loans extended by the Industrial and Commercial Bank of China, the top small business lender in China. And let’s not forget Apple’s surprise announcement of the coming of Apple Card, which has sent the entire financial services industry into a frenzy.

If retail banks don’t catch up to speed, there’s a very real possibility that they’ll be replaced by tech giants, according to a survey of UK banking customers and executives by Pepper, Bank Leumi’s digital-only unit. About 66% of retail banking executives expect that platform companies will offer full banking services in the next five years and will snatch clients both from incumbents and neobanks. For all that, only 29% of customers believe tech giants will overtake retail and digital-only banks.

Go for sticky relationships

Big techs have some pretty big advantages over incumbent banks. Let us count the ways: a large and ever-expanding user base, low online acquisition costs, big data insights supporting pricing and risk management and internet banking licences. What’s clear at this point is that they don’t exactly see expanding into financial services as a final goal, but rather as a tool to further increase customer loyalty.

When it comes to the quality and speed of service, one of the biggest strengths of tech companies compared to traditional lenders is of course the out-of-this-world customer experience they offer. And small acts of convenience go a long way. Many consumers now have a stronger emotional connection with tech brands, like Apple, Google and Amazon, than with their primary banks, Deloitte has found.

So banks must pay closer attention to how they make their customers feel if they want to build sticky relationships. Why? Emotionally connected customers are more valuable: the top 25% of respondents in Deloitte’s study who ranked their bank the highest also had a higher number of products with their primary bank. The list of favourite brands was topped by digital service providers, including Apple, Google, Amazon, Samsung and Microsoft.

Satisfy needs, don’t just push products

In an ironic twist, while a bank of Amazon doesn’t exist (yet), US consumers already give the tech behemoth much higher loyalty scores than they give banks, according to a recent survey. The platform company has an excellent position to expand into financial services, no doubt: 37% of people who don’t even use Amazon for e-commerce purchases would try its free online bank account.

To boost competitiveness and fend off forays by big tech companies, retail banks have a lot to learn from Amazon. Three areas stand out, as Bain & Co. suggests:

  1. Banks should put their customers first and come up with new and innovative ways to satisfy their needs instead of simply pushing products.
  2. When it comes to new initiatives and propositions, incumbents need to learn how to move faster, “discarding decision-making by committee”.
  3. By joining forces with tech companies, banks can access new distribution channels, boost data science capabilities and learn the ropes of experience design.

As always, the best defence is a good offence: proactively developing personalised digital solutions is a sure-fire recipe for preparing for the inevitable competition from tech giants, according to digital banking expert Jim Marous. He also believes that this will most likely result in “new partnerships inside and outside of traditional banking organizations and a redefinition of what a banking ecosystem includes”.

Team up with big techs, if you dare

While most traditional banks are bracing for increased competition from big techs in financial services, some of them have decided to make nice with platform giants to generate more digital revenues. What’s more, banks can now work together both with fintechs and big techs at the same time. Let’s see how some of these unlikely friendships have played out so far.

Alibaba, for instance, has agreed with online lender Kabbage to offer point-of-sale loans of up to $150,000 to small businesses in the US to help them finance their orders on Alibaba.com in a new program called Pay Later. The collaboration also includes Kabbage’s Utah-based banking partner Celtic Bank, which issues all the fintech’s loans in the US, including those extended to Alibaba customers.

The cooperation has the potential to bring value for all three partners involved: Alibaba benefits from Kabbage’s capability to leverage big data and machine learning, and determine eligibility faster than a traditional bank. Meanwhile, Kabbage can connect directly with small companies looking for access to cash. As part of the deal, Celtic Bank can further increase the volume of credit it extends to customers through Kabbage.

Partnering with platform companies is often the fastest way for traditional banks to drive up digital revenues, Accenture has confirmed. JP Morgan Chase, for example, has joined forces with Amazon to issue credit cards with cash back to Amazon Prime members, gaining access to the sizeable market of some 100 million Amazon Prime customers worldwide. And that’s not all. The two companies have reportedly started talks about launching an Amazon-branded current account.

Despite these tempting benefits, teaming up with tech giants can also be risky business for traditional financial institutions. Accenture warns that these partnerships are often asymmetrical: when negotiating with banks about signing them up for its Apple Pay business, Apple demanded all players to accept the deal at the same time so that none of them could get a bigger market share and request better conditions.

Of course, there’s always a looming possibility that banks will regret joining forces with big techs further along the way as they help them become strong competitors, Accenture says. The balance of power between JP Morgan Chase and Amazon has reportedly shifted in the big tech’s favour and the bank is trying to figure out “how to avoid becoming its latest casualty”, The Wall Street Journal has reported. But the gloomy picture is not without a silver lining. JP Morgan Chase has also learned something from Amazon: how to be obsessed with customer focus.



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