TechFin refers to the entry of technology majors into the financial services space. For instance, well-known technology players such as Amazon, Google, Apple, Facebook and several telecom companies have forayed into the lucrative BFSI sector. And this development adds to the woes of incumbents already fighting off specialized FinTech companies and branchless, licensed digital banks. And plenty of capital from aggressive VC funds is only adding fuel to the fire. All things considered, TechFin entrants seem to be winning!
TechFin refers to the entry of technology companies into the lucrative banking, financial services and insurance markets. As you are probably aware, more than 1.8 billion people don’t even have access to basic banking services. Also, the incumbents seem to leave a lot of existing customers dissatisfied. Several new players have emerged to take advantage of these unfulfilled needs. Also, a tidal wave of digital transformation is sweeping a variety of industries and the BFSI sector is no exception. The financial services sector is seeing a host of branchless digital banks and specialized FinTech companies focusing on specific products and customer niches.
Conventional industry barriers have disintegrated. And this has led to the entry of technology companies into unrelated industries. For example, Apple has entered the mobile phone space. Another example is Google’s entry into self-driving cars. And Amazon’s domination of cloud computing is yet another example. And the banking, financial services and insurance sectors seem to be next in line for disruption by BigTech.
Why are tech firms keen on entering the financial services market?
- High revenue per customer
From a revenue-per-customer perspective, financial services is a lucrative business to be in. Traditional banks have been enjoying a huge spread between the interest they pay depositors and the rate at which they lend. And now the tech majors want a piece of the action. - Huge unmet demand
Despite decades of existence, the incumbents have left out a huge chunk of the world’s population. About almost 2 billion people have no access to any banking and other financial services. This leaves a lot of head room in the industry. And with the proliferation of smart phones, it is easy for tech companies to offer financial services at low prices to the unbanked. - Growing customer dissatisfaction with incumbents
Most customers of traditional banks are quite dissatisfied. Poor customer service is one factor. Privacy violations, frauds and lack of cyber security are other factors. Also, customers have now come to expect the same level of prompt customer support that they get from Netflix and Amazon. - Failure of incumbents to adapt to emerging technologies
Incumbent banks have been quite slow in adopting new technologies. And this is also true of other financial services and insurance companies.
What are the growth drivers for TechFin?
Proliferation of smart phones and sophisticated IoT devices is a huge growth factor. And the fall of the so called ‘industry barriers’ is clearly another. But natural product synergies with financial services, particularly for ecommerce companies seems to be the precipitating enabler. Plus, BigTech’s large base of loyal customers certainly helps. And rather unexpectedly, governments and central banks across the world are open to the entry of tech majors into the BFSI space. This is a huge impetus for TechFin.
Let’s examine each of these growth drivers in some detail.
- Software is eating the world!
As the title of the influential New York Times article by Marc Andreesen suggests, software is transforming virtually every industry. Successful entry of Apple into the cut-throat smart phones industry is a good example. And leadership of Amazon in the competitive cloud computing market is another. Yet another example is the disruption of the hospitality industry by Airbnb. It’s clear that the so-called industry barriers no longer exist. - Natural product synergies
E-tailers can easily bundle financial services along with their core products. As a case in point, Amazon already provides payment services with Amazon Pay, for any product bought including instalment payments. By extension, it can also offer loans and insurance for the products bought. Also, Amazon offers credit to its suppliers in several markets. And when compared to conventional banks, it has better visibility of the suppliers’ cash flows. Similarly, nothing prevents Uber from offering vehicle finance to enrolled drivers. And Uber can also enable utility payments such as traffic toll payments, taxes and insurance premiums. At a broader level, you may even wonder if payments, lending and insurance will continue to exist as independent products? Or will they get integrated into ecommerce offerings as mere features. - Technology-friendly regulatory environment
Fortunately for the tech majors, several governments and regulatory agencies across the world do not seem to differentiate between fintech companies, technology companies and conventional banks when it comes to granting new digital banking licenses. A case in point is digital banking licenses for Alibaba (Ant Financial) and Hong Kong Telecom, in Hong Kong. Even the Singapore government has given away banking licenses to tech companies. - Rising customer expectations
Today’s customers have got used to the easy user interfaces and prompt customer service from top ecommerce players. For example, WeChat and WhatsApp offer payment services right inside their messaging apps. Unsurprisingly, the younger, digitally-savvy customers expect the same standards from their banks.
So, what is BigTech’s grand banking strategy?
Google, Apple and Amazon – all started their entry with their payment apps. And have gradually expanded their services.
Apple has a mobile wallet and payment service called Apple Pay. It entered the credit card business recently with a partnership with Goldman Sachs.
Uber has launched Uber Money. This is a digital wallet that helps its drivers store money and make electronic payments. It also has a debit card offering. More recently, with a partnership with Barclays, it is offering credit cards to its drivers. Can Uber offer similar services to its millions of customers? Probably, yes!
What about Amazon? Amazon is unbundling the traditional bank! It is developing a host of individual financial products and services. And it is testing them in different markets in the world. Like the other tech companies, Amazon started with Amazon Pay. It also has a lending program for its merchants. And a customer can deposit cash into a digital account at a partner brick-and-mortar retail outlet using Amazon Cash. Also, soon, you can make a voice-based payment service using Alexa.
What is Google doing in this space? Google entered the payments space with its app, Google Pay. Now it is revamping its peer-to-peer payment app to a super-app. And this new app offers basic banking services under the moniker, Plex. Google has tied up with about 11 banks and credit unions to handle the back-end. And the company will also offer money management services just like digital banks. And you can get all these services for free. Plus, you don’t even have to maintain a minimum balance in the account.
It’s clear to us that now, tech majors like Amazon and Google want to become our bank without becoming a bank, officially! The idea is to not apply for a banking license. And not get saddled with the regulatory and compliance burden like regular banks. But use the incumbents as partners to tackle the grunt work of regulatory compliance. Of course, once they gain traction, nothing prevents them becoming licensed banks in one fell swoop!
What is the future of TechFin?
Most incumbents are struggling to keep pace with emerging technologies. To be fair, several incumbent banks have upped investments in technology. But most of these funds have gone into improving legacy systems. And not towards investment in new technologies. Some banks have started partnering with new, nimble fintech startups. But again, these partnerships don’t seem to be taking off.
But digital banks and FinTech startups seem to be doing quite well, thanks to the rising millennial customer base and a lot of funding from VCs. Yet, building brands that are as powerful as the ones incumbent banks have built over decades, is a huge challenge! In contrast, for tech majors, technology prowess is their huge competitive advantage. Also, they have built formidable brands and large, loyal customer bases. And unlike the digital banks and fintechs that depend on outside capital, most tech majors are flush with cash. Does BigTech have any weaknesses? Yes. It’s their lack of banking and regulatory and compliance experience. This, they can overcome by hiring top bankers from the incumbent companies. And the growing field of RegTech can also ease some of this difficulty. Hence, all things considered, TechFin does look like a winning proposition!
