Plenty of digital ink has been spilled over the last month or so on the accelerating trend of Big Tech moving into financial services:
As of September 30, Goldman has lent out about $10 billion, and customers had $736 million in loan balances, the filings show.
With 2.4 billion users, the social networking company could single-handedly propel cryptocurrencies into the mainstream.
Unlike so many other fintech startups getting adoring attention (and untenable valuations), Uber Money is going to become a force in financial services.
Silicon Valley has already cracked payments. It is only a matter of time before it overturns more complex banking functions. Citi-Google could be a beachhead.
(Please kindly exclude data points that don’t fit into this narrative, such as the recent news of Amazon backing away from offering a deposit product, the significant speed bumps that Apple Card and Facebook/Libra have hit recently, and the lack of concrete details on Google’s ‘smart checking account’. Thank you.)
Call them super apps or embedded finance or headless banking. Whatever. The underlying mechanics are the same. A large technology company leverages the pre-existing relationships that it has with buyers and suppliers on its platform to offer financial products in a significantly more convenient fashion.
That convenience is driven by a combination of the proprietary data that the company already has about the customer — which facilitates more personalized interactions — and the existing interaction channels in place between the customer and the company (usually an app) — which facilitates frictionless onboarding. The result is such a delightfully easy experience that it’s almost a no-brainer for a customer to say yes to, even if the actual product or service being offered isn’t that attractive on its own merits (see: Apple Card rewards).
Avoiding Becoming the ‘Dumb Utility’
The concern for banks, in this world of super apps, is that they will lose control of the customer relationship — where firms typically differentiate themselves and exercise pricing power — and instead be relegated to the role of providing banking-as-a-service infrastructure. Here’s Citi CEO Michael Corbat:
Citi is "very conscious around not being the dumb utility— being very conscious about not giving away unconsciously the client-customer ownership that’s there,”
So, how do banks that aren’t looking to make a hard pivot to banking-as-a-service respond? How do they maintain control of the customer relationship?
Conventional wisdom suggests that the answer is to continue furiously investing in the ‘convenience arms race’. Embrace digital transformation. Modernize legacy technology stacks. Break down silos. Scrub every ounce of friction out of every process that touches the customer. Become the oft discussed ‘Uber of banking’.
The conventional wisdom is wrong.
The lesson that banks should take from the Apple Card — and the rapid growth of its portfolio — is that large technology companies will ALWAYS be able to offer a more convenient experience than they can. Apple, Google, Facebook, and Uber employ the most talented (and expensive) UX designers in the world; they are swimming in vast oceans of proprietary customer data; and the billions of customers that generate that data are deeply (obsessively) engaged with their products, every second of every day.
The advantage that these organizations have in delivering convenient financial products and services, as extensions of their existing ecosystems, is insurmountable. Thus, strategically speaking, every incremental dollar banks spend trying to jump from ‘acceptably convenient’ to the ‘Uber of banking’ is a waste.
Zig When They Zag
Through partnerships with banking-as-a-service providers, companies like Apple and Google are jumping into financial services without having to obtain regulatory approval. This is a clever sidestep of rules in the U.S. that were put in place to keep banking separate from non-banking businesses:
The US Bank Holding Company Act of 1956 was, after all, designed to keep banking and non-banking businesses separate, for fear that a company would use its banking arm to push consumers towards its core business.
And even though the rules themselves have failed to constrain non-bank providers from getting into the game, the original motivation behind the rules offers a hint for how banks should respond to this competitive threat:
“for fear that a company would use its banking arm to push consumers towards its core business”
That statement perfectly describes the ambitions of big technology companies when it comes to financial services. Apple wants to deepen the value of owning an iPhone (so that you’ll buy more iPhones). Uber wants to make the gig economy more attractive (so it can better recruit and retain drivers). Google and Facebook want to drive drive payment activity through their platforms and capture data (so that they can sell more ads).
Bottom line: Big Tech isn’t getting into banking because it wants to make banking better. Big Tech is getting into banking to make bank on its existing businesses.
And this is an opportunity for banks.
Because banking does need to be better. Specifically, in a world where technology companies are making it continually easier for consumers to spend, someone will need to make it easier for them to save.
Banks looking for a sustainable strategy for continuing to own the customer relationship would be well served to avoid the convenience trap and focus on building products and services that meaningfully improve customers’ financial health.
What exactly would such a financial health service look like? Speaking as a financial services consumer, I’d like to see something like this:
Who should be more afraid of Big Tech’s push into financial services, challenger banks or community banks? Survey data says that community banks are more threatened by big tech companies than by large national banks and challenger banks are projecting confidence, but I’d put my money on community banks.
Fundamentally, a bank is a balance sheet, a data-processing system and a sales force. Silicon Valley companies may be content to leave the balance sheet, the most heavily regulated bit, to the banks. But they are coming for the other parts.
Finally, if you haven’t taken the time to read Matt Harris’s (@mattcharris) hypothesis on fintech as the fourth major platform technology (following the internet, cloud, and mobile), please do so now. Part one lays out a very compelling premise and part two colors it in with an interesting and diverse set of examples.