Tech Companies Are Becoming Banks
Move aside, Neo-banking and Fintech, Here Comes Tech Giants Rolling into the Finance space
How are you paying for this transaction? You reach for your wallet. Instead of taking out a bank debit or credit card, your card looks especially different: it is black and decorated with iridescent-looking dots. Maybe it is just a slab of white. Perhaps it might be shades of green on a white background. Regardless, there is either a Mastercard or Visa logo on it. You make your payment and you’re on your way. In that transaction, the only thing related to the bank is the merchant’s account receiving payments.
If you haven’t noticed, those cards belong to non-banking companies. Namely, ride-hailing giant Uber, tech behemoth Apple and Singapore-based super app Grab, in that order.
Move aside, neo banks and fintech startups, these giants are on their way to disrupting you too.
In 2014, American Banker found that many legacy banks are still operating on systems built 40-plus years ago — and those who can maintain it are either retired or dead.
Meet COBOL, also known as common business-oriented language. It is a sixty-year-old programming language designed primarily for business, financial and administrative systems. If you swipe your ATM card, there is a 95% chance you are using COBOL code. For new developers, learning COBOL is akin to swallowing a “barbed cube-shaped pill”. For financial institutions and federal agencies, they wish more people started doing that.
Learning COBOL is akin to swallowing a barbed cube-shaped pill.
Due to ancient code and legacy systems, it is tough for banks to adapt and offer digital innovations in the current era. Unfortunately, seeing the writing in the wall is not enough; companies simply don’t have enough money to make the change and the timelines can be excruciatingly long. Underbanked populations will go underbanked even longer. People that are frustrated with their interfaces and speeds will have to stay that way for a while more.
This made the case for neo banks, also called challenger banks.
Without a physical branch, these fintech startups operate using a digital platform. If you need assistance, you have 24/7 live support. Since they are built using faster and lighter programming languages, innovations are aplenty. They can leapfrog over traditional infrastructure.
These digital banks are rolling out everything from high-yield savings account to mobile debit cards, all operated on a single mobile application. It is a force to contend with: as KPMG noted, even incumbent banks and their digital offerings have “much to learn from these digital game-changers”.
Many are raising questions about this banking gold-rush: is it a quixotic quest for market share or will it hold against the tides of time? With megadeals and billions being poured into this industry, it seems like cash is constantly being burnt without many positive returns. Newer digital banks also have to fight for market share in a noisy market.
What if there were companies that already had their own users, with a daily volume in the hundreds of millions?
The next piece of the puzzle for many tech giants seems to be financial services.
The next piece of the puzzle for many tech giants seems to be financial services, with these companies frantically establishing teams to focus on that sector. Grab Financial Group is the brainchild behind Grab’s payment services. Uber Money is the team behind Uber’s latest financial products.
Besides ride-hailing giants, big tech companies are also diving deeper into banking. Code-named Cache, Google will soon offer checking accounts to consumers under a project in partnership with Citigroup Inc. Amazon explored checking accounts too. Facebook released Facebook Pay—practically their version of Venmo. Let’s also not forget that Facebook wanted to unite the world’s currency with the cryptocurrency Libra.
With a volume of users the same size as some countries’ populations, these companies are poised to entrap consumers even further into their own ecosystem. For instance, Grab wants you to make payments, transfer money, and take loans in the same app you use to order food and book taxis. They even launched their own numberless card.
The best way to know how to establish themselves as the financial service provider is to look across to Asia. Tech firms there bulldozed their way into the lives of consumers and won, making them a perfect playbook for the West to follow.
“Hey there, I need ¥50 to buy food later,” the beggar says. “Do you have some spare cash?”
You shake your head—your wallet is empty and all you have are membership cards. You decide to fend off the beggar and tell her that you do not have any cash on hand.
“That’s okay,” the beggar says, whipping out a card with a QR code. “I accept donations through WeChat.”
It sounds extraordinary but that perfectly summarises the mobile payment revolution in China. Today, more than three-quarters of Chinese people are using digital payments as opposed to cash and that number is going to continuing rising. While many are still in the credit and debit card revolution, China has leapfrogged that to advance into mobile technology.
A common refrain for most foreigners living in China is always about how they will manage to deal with paper money again back at home. In China, you pay for everything on your mobile phone, from your morning coffee to your afternoon lunch, then your nighttime drinks to movie tickets, and finally the cab driver or metro on the way home.
In 2018, $41.51 trillion worth of transactions were made through mobile payments. This is only possible because of two companies, where both of them were created as players in other spaces.
Alibaba’s Foray into Payments and Finance
Alibaba was founded in 1999 as a marketplace. It was meant as a listing site, to connect Chinese manufacturers and suppliers with overseas companies. At that time, a vast majority of suppliers did not have debit or credit cards. Hence, Alipay was created as a way for them to receive payments and the transactional volume steadily increased.
In response, Ant Financial was created in 2014 to support the financial infrastructure. With its platform business model, Ant processed more payments, eventually hitting $8 trillion in transactions in 2017—that’s 10% of the world’s total GDP or about three times the size of the UK’s GDP. The meteoric growth also led to Ant being worth 50% more than Goldman Sachs, a 150-year-old financial institution.
Today, Ant is offering other financial products as well such as asset management, loans, insurance, and credit profiling.
From Messaging to Being The State’s ID System
For many outside of China, people who haven’t heard of WeChat may think it is the East’s equivalent to messaging service Whatsapp. For the Chinese, WeChat is an indispensable part of their everyday lives. What was initially launched by Tencent as a messaging app has now steadily evolved to having games, news, and payments.
In its latest development, state-issued IDs are being replaced by WeChat electronic IDs.
For the West to catch up, there is much to do. One, the country is not poised for a big tech takeover like China—regulations and authorities would step in. In the States, a House Bill was surfaced specifically to keep big tech out of finance. Two, US consumers are not prone to switching banks even if they may not entirely trust their banks, as the latest data from J.D. Power shows. Digital banks are not that popular and many still rely on ‘chunky’ financial institutions like Chase and J.P. Morgan. Three, challenger banks and disruptors may be lean but they had reliability problems as well, like Chime’s “intermittent outage”.
Big tech firms can most likely deliver financial services better than these fintech startups but speed is the problem. With regulations, penalties, and fines waiting to strike anytime, tech companies need to tread carefully—at least, better than what Mark Zuckerberg did with Libra. Cooperation is key, not competition. It is the era of co-branded credit cards and checking accounts. With the already existing consumer lock-in, these big tech firms can get all the business and finance benefits without having to deal with regulatory headaches.
For the most part, these firms don’t even need to make money off the banking products. Unlike neo banks and fintech startups that rely on transactions, management fees and the like for revenue, these big tech firms are built on other business models. In fact, neo banks like Revolut and Berlin-based N26 are still not making money, despite having raised hundreds of millions thus far.
For big tech firms, venturing into finance is almost like child’s play, especially with reliable infrastructure and consumer data.
While nobody is becoming a bank now, it is just a matter of when. Today, it is just credit cards, checking accounts and the like. For a long time, it will be like this. Albeit tepid early efforts, these big tech firms are much likely to have bigger designs. Neo banks have paved the way for traditional banks and tech firms to understand the kind of financial innovation that can be offered. In every sense of the phrase, neo banks are now literally able to die by their own sword.