Will US platform firms follow in the footsteps of their Chinese counterparts and start offering fully-fledged banking services?

Lately, the threat of Google, Apple, Facebook and Amazon (aka the GAFA group) encroaching on traditional banks’ turf has become a reality. Most bank executives are well aware that it’s now a question of when, not if, GAFA will launch actual banking services. According to a report by Marketforce, in 2017 as many as 83% of senior bankers expected Amazon to enter mainstream banking within a decade. And 66% believed this would happen within just five years.

Changing customer behaviour has also been fuelling fears about tech titans moving into mainstream banking. A recent survey by Bain & Company shows that when it comes to customer loyalty, Amazon smashes traditional banks in the US. Not to mention that 65% of Amazon Prime respondents say they would sign up for a free bank account with Amazon, along with 43% of non-Prime customers, plus 37% of those who don’t even shop on Amazon. Perhaps even more alarming for banks is that according to Bain’s latest annual report, 54% of respondents across the globe would trust at least one tech firm with their money more than banks. In general, customers aged 18-34 are more willing to try banking with a tech giant than their older peers, with interest being the greatest in China, India, Colombia, Hong Kong and the UAE.

Tech giants already act like banks

Make no mistake: the GAFA group is already pretty active in financial services and they have gained a firm foothold in the payments market. In 2018, Google launched a new payments platform, Google Pay, which brings together Google Wallet and Android Pay, and supports peer-to-peer payments, tap-to-pay purchases in stores as well as mobile ticketing. Facebook runs a peer-to-peer payment system via Messenger and is expected to drop its own cryptocurrency over the next year. Amazon Pay not only lets users make payments online but it has been looking to expand from online sales to brick-and-mortar transactions.

But GAFA’s expansion doesn’t stop here. Apple has set alarm bells ringing with its recent announcement that it will soon be rolling out Apple Card, a fully functioning credit card, having teamed up with Goldman Sachs. In other news, Facebook has partnered with London-based TransferWise to provide international money transfers. To top it all off, most of the GAFA players have already secured an e-money licence in Europe: Facebook was issued its permit in Ireland as early as in 2016, while Amazon Payments Europe has a licence in Luxembourg, and Google in Lithuania.

In many ways, Amazon already looks like a bank, having built up quite a portfolio of financial products. Take Amazon Cash, for example. It allows cash-only customers to add funds to their Amazon accounts at brick-and-mortar retailers. These clients can also earn rewards on purchases, which effectively makes Amazon Cash a bank account. In addition to payments and deposits, Amazon also offers short-term loans to its sellers to help them fund their inventory purchases. The company has also released its Amazon Rewards Visa Signature Card, partnering with JPMorgan Chase. And if that wasn’t enough, the tech company was reported to be in talks with Chase in March 2018 about setting up a current account service for younger customers and those without a bank account.

Will GAFA 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, aka the Chinese Google, was given the go-ahead in 2017 for its joint venture with Citic Bank to launch AiBank, an AI-powered online bank.
  • Alibaba has created Ant Financial, which runs the AliPay payment platform and manages Yu’e Bao, the world’s biggest money-market fund. Ant Financial is thriving and has been eyeing the European market. Alibaba has also established online bank MYbank and even tried to acquire US money transfer company MoneyGram.
  • Gaming and investment conglomerate 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 card provider UnionPay, according to Juniper. It’s also set up its own challenger bank, WeBank, and is expected to move into the Australian market.

Recently, other Asian tech champions have also started following their example. In Hong Kong, online insurer ZhongAn has just bagged a virtual banking licence, while in South Korea, Kakao Bank, founded by the company behind Kakao Talk, the country’s largest chat app, has also got the green light from authorities.

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”.

Post-PSD2: concerns on the rise

In any case, with PSD2 and open banking now live, the headache will probably get worse. Last January 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 companies to launch financial products, using data previously guarded by banks.

The bad news for banks is that Amazon, Facebook, Google and Apple are not going anywhere. They all have legions of users, ginormous 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.

This post was originally published on 11 January 2018 and has been updated to include recent developments.

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