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Banks and Big Tech: the promise and the peril

By Matt Locsin, Global Head of Innovation, Publicis Sapient

Big name banks and Big Tech have been signing a number of deals in recent years. Google’s venture into digital checking and savings accounts has enlisted Citi and a number of smaller players, such as BBVA and BMO Harris. Apple’s has stepped into consumer credit on the arm of Goldman Sachs, and Amazon is expanding from its commercial lending base into consumer lending with everyday cards issued by Chase and Synchrony. For incumbent financial services players, the convergence of these industries holds real promise but also poses significant strategic risks.

Let’s start with the promise. Partnerships with Big Tech grant financial services firms access to huge numbers of potential new customers. Amazon has 112 million Prime members and 2 million Marketplace sellers worldwide. Google has 39 million Google Pay users, and in a survey, 16% of Millennials and 13% of Gen X-ers said that they would make a Google checking account their primary account. These are not just cold leads; tech companies know when customers are planning a holiday, shipping kids off to school, or thinking about buying a home. They have the ability to propose the right product to the right person at the right time.

Big Tech partnerships also promise banks access to torrents of data, new capabilities, and cutting-edge technology. The data that Big Tech holds on customers, their interactions, and their transactions, can transform essential bank operations, such as credit decisioning, pricing insurance policies, or regulatory compliance. And Big Tech brings remarkable capability to the party, such as cloud services, analytics, security solutions, and disaster recovery. Further, Big Tech’s ability to invest and develop these technologies dwarfs that
of incumbent banks; a tie-up provides cost-effective access to the latest kit.

Finally, a partnership with Big Tech offers banks’ brands a shot in the arm. Even before the 2008 financial crisis, banks’ reputations were in decline; since then, reputational recovery has been slow. To reverse the damage and step up their brand game, Incumbent banks could leverage lessons in customer experience from a big tech partner.

Each of these benefits come with a corresponding risk and incumbent banks ignore them (wilfully or otherwise) at their peril.

The great cut-in
Big Tech is far more likely to end up owning the customer relationship than its financial services partners. Google’s digital checking account would see the company provide the front-end, customer experience, and mine financial insights as the backbone of personalised advice. This is not just Big Tech playing to its strengths, owning and controlling the customer experience is central to their platform business models.

Matt Locsin

Matt Locsin

Most banks still think of themselves as having a direct and meaningful relationship with their customers; it is the basis upon which they offer prudent advice and personalised service. Indeed, many depend on it as a means to cross-sell products and maximise lifetime customer value. Further, if a Big Tech partner were to develop aggregation or payment initiation services, this could further weaken banks’ stability and lead to an increased cost of funds. If banks are not careful, they could find themselves becoming the anonymous financial plumbing of e-commerce, mobility, media, and other industries.

Keeping up with the GAFAs
Though Big Tech can grant incumbent banks access to new data, capability, and technology, banks need to be able to use these things effectively in order to keep pace with their partners. As noted, customer experience matters, and Big Tech is not likely to tolerate any risk of disruption or increasing friction from the operational deficiencies of their partners. If credit decisions are not snappy, account opening isn’t a breeze, or if payments take too long to settle, would-be partners are likely to be binned.

Friend today, competitor tomorrow

Some of Big Tech’s moves into financial services, beyond partnerships, are outright competitive, targeting lucrative financial product categories or launching products central to Big Tech’s core businesses. These moves started years ago with payments, where e-commerce players created products to facilitate trust between sellers and buyers online. The use of mobile payments has grown briskly since. In China, mobile payments account for 16% of GDP, thanks to players like Alibaba’s Alipay and Tencent’s Tenpay.

Amazon has steadily moved into financial products necessary to increase users and transactions on its core platform. Payments are a given (Amazon Pay) but it also offers credit through Amazon Lending and insurance (Amazon Protect). And Uber and Lyft are fighting to attract and retain drivers with mobile payments, bank accounts, and credit
—products that make working with these ride-hailing giants ostensibly easier.

Few observers or analysts believe that Big Tech wants to subsume banking outright. The cost of compliance and the complexity of operating in a regulated industry are enough of a turn-off. But there is little to stop Big Tech from cherry-picking the products and services that matter to them or their customers. Indeed, the rise of Banking-As-A-Service is making the aggregation of essential infrastructure remarkably easy. So, where banks and technology companies today find common cause, could become tomorrow’s battlegrounds.

Whether to partner with Big Tech and how are serious decisions for leaders of incumbent banks. With the benefits of doing so immediately clear, many big banks have already jumped in. But beneath the surface lie a number of rocky issues. If banks can navigate the risks, it could be the beginning of a beautiful friendship.

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