You can’t go a day without seeing an article citing how some newly arrived fintech startup is going to destroy banks and banking as we know them. While there is meaningful innovation coming from these startups, there’s not much evidence (yet) that they pose a significant threat to banks, measured by traditional metrics such as profit, revenue, customers or accounts. In response, many banks establish an innovation lab or incubators, content to play in the innovation sandpit in the belief that they have neutralised the threat. But innovation is best characterised as something you are, not something you have.
At last year’s Money2020, someone said of the competition between banks and fintechs that “banks have to find innovation before fintechs find distribution”. But what if the competitors have innovation and distribution? Banks must now consider a new reality, which is that the real emergent threat to banking isn’t the fintechs. The true threats are the giants Amazon (US), Alibaba and Tencent (China), and Rakuten (Japan). They have innovation, distribution and vision in abundance, but none of them could be regarded as a fintech. They each combine massive retail and wholesale operations with super-efficient infrastructure, operations, logistics and control over the payments that flow through their many businesses: retail, wholesale, ecommerce, insurance, travel, banking and investments, cloud infrastructure, artificial intelligence, and so on. A recent McKinsey article called them “platform” companies.
What about Apple, Facebook and Google? In my view, Apple doesn’t seek a broad footprint with its iTunes platform, and is more focused on delivering a better experience across all its devices, retail and web properties. I think this focus on controlling the experience necessarily limits their ambitions, and Apple Pay’s struggles are an example of this. Facebook is slowly building platform capabilities into Messenger, perhaps with the goal of becoming like Tencent’s WeChat, but they don’t yet have that reach into the physical world. Google’s goals in this space are less clear, but they seem focused on providing information services to others, without offering the same level of services or integration with the physical world that are provided by Amazon and Alibaba.
It’s interesting that the four platform giants started life as merchants or marketplaces, connecting buyers and sellers in the most efficient ways possible and building success with a relentless focus on providing better customer service, pricing and marketing. They have all built tremendous loyalty and trust with their customers. Perhaps what’s most illuminating is the way each of these companies have unified their separate businesses. They have built platforms that underpin and connect all their businesses. Customers are able to easily access the products or service of any of the businesses, connected by the platform. The platform companies collect exhaustive amounts of data on the behaviours of their customers and use it to sell more products and services. So far, we haven’t really seen the full impact of the usage of this data, but I’m sure that people who bought this item also liked this other item-type recommendations are just the tip of the iceberg.
In China, Alibaba’s Alipay and Tencent’s WeChat Pay have 90% of the mobile payment market (52% and 38% respectively). China Union Pay is in a distant third place. What Alipay and Tencent lack is international distribution, though Alibaba is making investments globally and especially across Asia. Tencent’s international expansion has looked much less assured by comparison, and it’s rare to see WeChat on the phone of a non-Chinese smartphone user. Amazon has a capable payment wallet and until recently also had the patented 1-Click process. However, Amazon’s wallet doesn’t have much footprint outside of Amazon’s own stores. We’ll have to wait and see if their rumoured interest in cryptocurrencies delivers something new.
Outside of payments, Amazon is in the small business lending business and announced last June that it had lent more than $1bn to small businesses in the US in the last 12 months, and more than $3bn since it started Amazon Lending in 2011. Amazon is clearly aiming at the segment abandoned by banks who withdrew from business lending after the 2008 crash. Amazon believes it can compete with better services, faster application processes and lower costs without the branch overhead.
Alibaba is partnering with Lending Club to provide business loans for US companies to buy products from Alibaba. Yuebao is another Alibaba service funds management platform that delivers better returns to investors than the banks provide. Yuebao attracted $81bn in just nine months because annualised returns averaged 6% (versus just 0.36% from the local banks).
Responding to threat
In contrast, Apple Pay is still very much a work in progress, and Apple’s reluctance to publish any serious stats points to lower levels of success than they’re used to. Google Pay is little more than a solid effort and unlikely to arouse passions in consumers or merchants. Facebook allows P2P payments over Messenger, but only for US consumers. PayPal has provided the same service for years, but has been unable to expand their service into point-of-sale (but it is one of the dominant ecommerce payment providers). PayPal has moved into the small business lending market, but neither Facebook, Apple or Google show signs of moving more broadly into financial services.
A recent survey of US consumers showed that Amazon is about as trusted as your bank. Other surveys have shown that banks are less trusted than tech companies. According to this survey, Apple, Google and Microsoft all trail Amazon in the trust stakes. Facebook and Twitter seem to have serious trust issues that perhaps can be linked to the election interference discussion. It’s difficult to identify similar trust ratings for the Chinese giants, but Jack Ma has spoken a lot about the importance of trust, and the success of Alibaba would seem to indicate they’re having some success.
How should banks respond to the threat posed by the big four platform companies? Clearly, what makes them so difficult to compete with is the platform they have each built that allows them to remove traditional industry barriers and move quickly and seamlessly to expand into new areas – just like supermarkets, airlines, loyalty, insurance, travel, and so on. You can see how the platform capability can be leveraged. Meanwhile, almost all banks are far behind platform capability. PSD2 is driving some level of awareness and openness in Europe, but one gets the distinct impression that some EU banks are only complying because they have to, not because they see a strategic benefit in doing so.
Even more challenging is that the banks’ thinking has been softened in the aftermath of the 2008 crisis, as many of them received large bailouts and many have underperforming assets buried in their balance sheets. They often shelter behind regulations, handouts and protections on the basis of “too big to fail”. You won’t find that kind of softness in Alibaba and Amazon. The laser focus and ultra-efficient execution capabilities dwarf anything the banks can deploy. Banks need to think very strategically about transforming their systems.
Another area banks should consider is how they could partner with merchants to provide better financing options at the point of purchase. Banks have been slow to seize the opportunity, and fintechs such as Klarna, Affirm and AfterPay have moved into the space. I wrote an article several weeks ago about the importance of the “consumer experience” in commercial transactions, and how it required thinking about more than just processing the payment. Fulfilment is the last leg of any commercial transaction and another area the platform giants are exploring, from drone deliveries, two-hour delivery promises, and so on.
Banks have the financial muscle to be able to bring this whole platform ecosystem together, but none have shown the vision or appetite. In failing to respond, they must walk a tightrope between gradually losing market share to the platform companies, and relying on consumer trust. They may find that trust is a very liquid commodity. To put it simply, banks must build a platform ecosystem before the tech giants can gain consumers’ financial trust.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo by Zapp2Photo, Shutterstock.com