Inside the plush headquarters of high street banks, executives have made a show of opening up their wallets during meetings to reveal brightly coloured cards issued by start-up rivals.
Their message is clear: We may work at incumbent banks but we’re paying attention to fledgling businesses seeking to steal our customers.
Now, a new wave of competition is coming that may force bank executives to buy bigger wallets.
Some of the world’s largest technology companies, including Google, Facebook and Amazon, are eyeing financial services as a lucrative opportunity. They are pushing hard into a space once dominated by established players who are increasingly under threat.
Last week, Google announced that it would partner with banks to launch its own digital accounts in 2021. It follows Apple’s metal card and accompanying accounts launched last year with Goldman Sachs.
“Google Pay can now do nearly everything most banks can do in the US. So what do I need a bank app for,” asks Simon Taylor, a co-founder of financial technology consultancy 11:FS. There’s a real danger that having an account with a high street bank becomes as old-fashioned as sending handwritten letters.
For a glimpse of the future, many believe the astonishing rise of China’s giant financial technology companies including Ant Financial and Tencent offers a valuable lesson.
In the world’s most populous country, retail banking has already been turned upside down by new payments apps launched by tech companies — and a bitter clash has erupted for control of the industry.
In the UK, Accenture research has found that 11.6bn transactions, worth up to £155bn, could shift away from cash altogether by 2023. The company expects the number of digital transactions in the UK to rise to 50bn by 2030.
It’s no surprise that almost every global technology business now has its own financial services project. Facebook launched Libra, a global cryptocurrency scheme, and is developing its own virtual wallet. Amazon is hoping to expand its lending service by partnering with Goldman Sachs.
Most of these services are still small in scale and only available in the US. But it is only a matter of time before technology giants work out the precise product which they will seek to expand around the world.
“If you fast forward to a world where big tech is a more significant player in financial services then there’s absolutely no doubt that would go with global expansion as well,” says Tom Merry, the head of financial services strategy at Accenture.
Companies like Google and Apple also benefit from a giant funnel of billions of users who could be potential customers for their new digital banks.
Imagine if every time you searched on Google you were asked if you want to open a Google bank account. Or every time you made an Apple Pay transaction you were offered a discount on the Apple Card.
Apple announced its Apple Card service last year
Credit: AP
Experts point to partnerships, whether with Goldman Sachs or other large banks, as a key ray of sunshine. “My sense is at the moment that they have a focus on being technology providers to the industry,” Merry says.
It’s also unlikely that any social network is keen to open itself up to more regulatory scrutiny by gaining its own banking licence.
“The additional regulatory scrutiny would be unwelcome, and, to the extent that banking were to become a sizeable activity for a technology company, its stock would likely suffer material multiple compression in a valuation context,” says John Cronin, a banking analyst at Goodbody.
The world’s largest companies aren’t an immediate threat to incumbent banks but executives are unlikely to feel comfortable any time soon with Google and Amazon sniffing around the sector while start-ups like Monzo and Revolut attempt to siphon away customers.
Revolut is the only one of the three fintech banks which is profitable
It’s not yet clear what form the high street bank fightback against multiplying rivals will take. Perhaps the answer can be found in the recent crackdown by Chinese regulators on Ant Financial.
The company was due to raise $34.5bn (£26bn) in the world’s largest float but regulators pulled the plug just days before and introduced a set of new requirements on the business.
Could financial regulators in the West take a similar approach? One reason this hasn’t yet happened is that start-ups haven’t grown large enough to cause serious problems, according to Charlie Delingpole, the chief executive of ComplyAdvantage, a regulatory screening company.
“Is there anyone that is so successful that everyone else is fearful of them and wants to crack down upon them? I don’t think we have any winners of that stature and scale at least in the UK,” he says.
But this does become a potential scenario if technology giants continue to muscle in on financial services.
Facebook Libra | Q&A
“I wonder if Libra was the beginning of that,” Taylor says. Facebook changed its plans for Libra to also support existing currencies earlier this year following regulatory unease about the focus on its cryptocurrency. “That backlash potential has already happened to a certain degree,” Taylor says.
The future of financial services is still unclear. Will global businesses like Google and Amazon seek to muscle in on the world of banking or just use their products as ways to encourage banks to use their cloud computing technology?
Executives at incumbent banks already have their hands full with fending off challenger banks. Now they face an uncertain future as technology giants consider joining the fray.
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