In the last month, there’s been a wave of announcements from Facebook, Apple, Google and Amazon about banking. We’ve seen Facebook’s major activities in trying to create a digital currency called Libra, and Apple’s move into finance with a credit card from Goldman Sachs which, in just a month, offered a $10 billion line of credit. Then, last week, Google partnered with Citi to offer a deposit account, as has Amazon and JPMorgan Chase.
The result is a media frenzy of coverage, talking about the big move of Big Tech into banking. My own take on this I’ve posted several times, most recently saying that Big Tech can only get into banking with Big Banks.
So, why am I writing about this yet again?
I’m writing about this yet again because most media coverage is completely getting this wrong. They’re saying banks are dead meat and tech is taking over. Maybe the most interesting example of this is The Financial Times. In an article by Robert Armstrong, he states:
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. If banks such as Citi — which can trace its roots to 1812 — are seeking to do deals with them, you can expect plenty more to follow.
Robert has got this right. Big Banks are highly capitalised and offer secure infrastructure for financial transaction processing. As I’ve written many, many, many times (read my books), banks are a combination of a manufacturer (balance sheet), infrastructure (data processing) and retailing (sales). When banks grow up, they will work out that they need to choose to focus upon their business models and which of these areas is of most import. And some banks are growing up. JPMC, Citi and Goldman are all choosing to be manufacturers and processors to the Big Tech giants.
However, this does not mean it is at the cost of their retailing operations. It is a choice to add volume to their networks and make these partnerships before someone else does. We’ve seen this before. Twenty years ago, RBS did a deal with Tesco to run their back-end banking operations. Eventually, Tesco opened a full-service bank and left that deal. Has Tesco decimated RBS? No. But RBS said back at the time that it was all about getting more volume.
Again, as Robert points out, Wal*Mart tried the same market grab.
This phenomenon is not new: 20 years ago, Walmart tried to get into the retail banking business. After 10 years of trying, and waves of regulatory and political uproar, the retailer raised a white flag.
What is key here is the regulatory and political uproar. Regulators will not allow Big Tech to take over Big Banking. They would worry too much about risk and data abuse. As a result, as I’ve said often, the likes of Facebook and Co will not succeed in getting into Big Banking. They will be blocked. Even if they tried, they would find the regulatory burden too much. The average bank has five times more regulatory oversight than the average technology firm. Why would you want five times more breathing down your neck? Equally, a lightly regulated market is sprightly and fast and innovative; a heavily regulated market is big and slow and risk averse. The two are at opposites, so why would the Big Tech want to get into Big Banking when it means they’re going to be given handcuffs and shackles to be slow to change?
No. It is far better to do this in partnership with banks, not at opposites with banks, especially when banks are your best customers. Amazon’s AWS gets a huge amount of business from banks; Google gets a huge amount of revenue from bank advertising, as does Facebook. The bank as a customer means you don’t want to be a bank’s competitor. Even if you did want to compete, it’s incredibly hard as the regulatory overhead is too high. That’s what Tesco, Wal*Mart and others have discovered, and it’s what Google, Facebook and Amazon are discovering.
Therefore, when you look at Robert’s last assertion, I think it is wrong.
For many years, when asked whether big tech was a competitive threat, bank executives said that ultimately Google, Apple, Facebook and Amazon would not want to get involved in a capital-intensive, hyper-regulated industry such as finance. As time passes this sounds less like a coherent argument and more like an expression of hope.
I disagree with that line, because they haven’t got involved in a capital-intensive, hyper-regulated industry such as finance. Rather, they’ve found a capital-intensive, hyper-regulated financial partner to help them offer finance. That’s a very different position.
Finally, all of these reports of Google, Apple and Amazon getting into banking are false.
Google is offering the ability for users to “access their bank accounts through the Google Pay app” and “other banks could join up later” … “this is more about Google Pay and how they plan to position that going forward to access all financial products, not just credit cards”.
It’s not a bank account and anything like full-service banking which, when it is, is owned by a bank.
Apple are offering finance from Goldman Sachs under a white label agreement, and all the banking services and financial operations are managed by Goldman Sachs.
It’s not a bank account and anything like full-service banking which, when it is, is owned by Goldman Sachs.
Amazon are now able to use a JPMorgan e-wallet that could “help them defend against getting cut out of the (gig economy) businesses they helped create”.
It’s not a bank account and anything like full-service banking which, when it is, is owned by JP Morgan Chase.
So puh-lease will media stop saying that Big Tech is getting into banking. They’re not. Big Tech are getting into partnerships with Big Banks and, even then, to offer a little more financial ease and not bank accounts. It’s almost like Open Banking for the Americans. That’s as far as it goes, end of.