I’ve said continually that firms like Google and Amazon will never open a bank. I still believe that this will be the case – Facebook and Apple also fall into this view – and mainly hold this view because these companies would find full service banking a difficult and unprofitable space. In fact, I’ve blogged about this before (several times), but return to the subject today because I noticed over the weekend that American Banker has reported about the fact that these firms are in active talks with the federal agencies. They won’t say what they’re talking about, but they’re talking.
This is no surprise, especially as Google, Apple, Amazon, and a group of other internet influencers such as PayPal, formed Financial Innovation Now last year, to lobby over internet commerce in the White House. They wrote a full and frank letter to the then President-elect Donald Trump. A short summary of that letter:
Dear President-elect Trump
On behalf of Financial Innovation Now, I would like to congratulate you on your recent election.
We urge your administration to adopt a national vision and coordinated strategy to 1) ensure we grow financial technology jobs in the US, and 2) foster competition and innovation in financial services to better serve consumers and the economy. To achieve these goals, we offer the following recommendations:
Appoint Financial Regulators Who Value Technology’s Potential
FIN urges you to consider appointing financial regulators who value technology and who will seek to promote innovation as a means to foster competition in financial services. In particular, we encourage the appointment of a Treasury Undersecretary for Technology, responsible for developing a national vision and coordinated strategy to ensure America is the best country to create companies and grow jobs developing financial technologies; and work across all federal financial regulators to foster competition and innovation in an antiquated banking sector to better serve consumers and the economy.
Promote Open, Interoperable Standards for Card Payment Security
FIN urges your administration to scrutinize technological barriers to payment security innovation and explore authentication methods that are truly standards-based, open, and interoperable.
Streamline Money Transmission Licensing
FIN recommends that your administration work with Congress and state regulators towards a streamlined federal money transmission licensing system that ensures adequate consumer protections while facilitating access to new payments services across the nation.
Ensure Consumer Access to Financial Accounts and Data
FIN recommends that your administration work to empower consumers to securely access their own accounts via whatever application or technology they wish, without charges that favor any one application or technology over another.
Streamline Small Business Access to Capital via the Internet
FIN recommends that your administration and Congress should streamline lending laws across state jurisdictions to account for the innovative lending market of today.
Help Consumers and Businesses Manage Money with Real-time Payments
FIN urges your administration to ensure the availability of real-time payment networks for all Americans by 2020 and ensure such networks are affordable and secure.
Leverage Mobile Technology to Increase Financial Inclusion
FIN urges your administration to promote technology and mobile financial services as a means to overcome old barriers to financial services.
What I personally see happening here is that the internet giants are awake to the opportunities and issues presented by banks. They also are very aware of the opportunities and methods to leverage relationships with their customers through finance.
I want that $999 Apple Mac or $1,000 camera on Amazon? Easy, click and it’s all wrapped up in easy payments of $100 a month. I don’t even know that they’ve given me a loan. I just used one click to buy, without having to shell out the money.
This is where the internet giants see their major leverage: making buying simple, easy and fun. It’s not about payments, but about wrapping finance into buying and selling, which is where it should be anyway. It is very much in line with the PayPal approach to small businesses. PayPal can see what business a company is achieving through their PayPal activities and just a few years ago launched loans for free.
You do pay a small setup fee for the loan, but there’s no interest charged. Brilliant. No wonder PayPal has lent over $3 billion to 115,000 small businesses in loans of up to $125,000 since 2013.
What does this mean for banks? IMHO, it means that the majority of bank products – particularly payments and credit – will be eaten by the internet. I don’t see the internet giants becoming banks. I just see them eating into the profitable bank products. They will be specifically looking at product adjacencies and complementary areas, such as the PayPal Working Capital example above.
For a bank, that means they are left with the expensive products, deposit accounts, without the cross-selling opportunities that are used to subsidize those accounts: credit cards, loans and charges. It means banks will have to end free banking services and start increasing fees for the privilege of having an account. It will mean some people will find those fees unaffordable and will become unbanked.
For the unbanked and underbanked, the internet giants will offer easier services to provide them with finance and payments support, and eventually FinTech firms and internet giants will pick them up with prepaid mobile wallets and easy microloans and microsavings accounts.
Gradually, this will all impact a banks’ bottom-line and banks will retrench into providing the large and complex infrastructures of global finance – the smart pipes – and their large and complex corporate client services, asset management services, wealth management and investment banking.
Long-term, the internet giants and their FinTech brothers become the consumer champion, and retail banking no longer looks anything like it is today. Then the internet giants and their FinTech brothers start to upscale, as any innovator will do.
In all of the above, what I’m describing is being able to do banking without being a bank. That is why I don’t see the internet giants becoming banks. I expect them instead to reimagine banking and finance for the internet age, and deliver it as a frictionless digital service that doesn’t feel anything like banking as it is today.