We have been hearing for months in the press that tech giants like Google, Apple, Amazon and Facebook have a huge appetite to offer financial services and to become banks. Many bankers are really worried about this possibility. The Chairman of BBVA, Francisco González, recently declared, “Banks are losing their monopoly on banking”. I personally think that there is a big misunderstanding here and a confusion between what offering some financial services means and what being a bank really is.
A company like Apple, through iTunes, possesses millions of consumers’ credit card details, so it would be relatively easy for Apple to build a “Pay with iTunes” solution / button and compete with Paypal, payment gateways or banks. Amazon could also easily replicate that model thanks to the credit cards details from their clients. Google recently tried to build a smooth payment solution based on Gmail, and Facebook recently got an e-money license to offer financial services in Europe. Paypal recently started offering short-term funding to their business clients in the UK, using their own capital to do so. Yu’e Bao (Alibaba-affiliated platform for money-market investment) challenges Chinese banks on savings deposits, and in just under a year, it amassed $92 billion in assets, which is really impressive. In conclusion, tech giants’ appetite for financial services, such as payments, is here to stay and we will probably see considerable innovation coming from them in the future.
A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. In other words, a bank links together customers that have capital deficits and customers with capital surpluses. To do so, a bank needs to meet capital requirements and to manage risk and defaults to stay in business. On top of that, banks offer many services like payments, credit cards, etc. However, their core business is most definitely the accepting of deposits and lending of funds.
Personally, I do not believe that tech giants will be interested in competing with banks on their core business for 3 main reasons:
1. Profitability
Tech giants are usually highly profitable companies, generating huge profits and free cash-flows, while banks (with the exception of investment banking) are much less profitable. So, why would companies like Google or Apple, who are able to continuously re-invent themselves with new, highly profitable products like the iPhone, the iPad or Android, invest in a much less profitable business like banking?
2. Regulation
Being a bank means dedicating huge resources to cope with regulation and being dependent on governments’ decisions regarding how regulation changes (Basel III, etc.). Tech giants have demonstrated that they hate being regulated and dependent on governments (think about companies like Facebook regarding privacy, AirBnB or Uber). Essentially, top bankers are, and need to be, like politicians / lobbyists while tech people like being “above the law”.
3. Growth rate
By default, a bank cannot be global from inception and can not scale as fast as tech companies. For a tech giant, incorporating banking services would mean accepting a much lower growth business than what they are used to from the tech industry.
What do you think: will the tech giants become serious competitors for banks in the near future? What services do you see them offering?
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