The new Observatory of Financial Digitisation of Funcas and KPMG It analyzes how big American and Asian digital companies have already fully entered financial services. The report considers that the future of banks is a matter of signing alliances with the right partners to continue competing in financial services.
The phenomenon called ‘Big Tech Banking’ has gone from a supposed threat to a reality in which Google, Amazon, Facebook and Apple, along with Asians Alibaba, Baidu and Tencent are deploying a varied range of new servicesThe report by Funcas and KPMG shows that all these companies already compete directly with the banks of all life.
appropriations consumption, payments (including foreign exchange) and insurance are the business areas where they have the most activity. It is no coincidence that they are the areas with the highest market volume and better profit margins. However, for the time being, the deposit-related business remains an unappealing area, both because of the regulation applied to it and because of the current situation of interest rates.
So far the banks saw how the strict regulation to which the financial sector is subject protected them from the competition of these big digital companies. But the big techs have found two formulas for developing their own financial services without being regulated as a bank.
On the one hand, digital players have managed to obtain licenses to operate as payment institutions in Europe, the United States, Mexico or India. These licenses allow you to develop money-sending services, open accounts to enter and receive cash, manage transfers, open credit lines of less than 12 months, execute telematic payment orders and deploy payment means services between countries.
The other great line of action of the big tech goes by searching partnerships with financial institutions that allow them to enter into more regulated and supervised businesses by a partner, prepared and with a great experience regarding regulatory compliance in different geographies. Meanwhile, the big tech focus on developing the best user experience possible.
This is the model behind the already famous Apple card, actually issued by Goldman Sachs, but designed and designed by the apple company. In fact, the problems with its algorithm, which offered more limited credit to women, have opened a new debate about the likely multiple dilemmas that these new alliances between big techs and banks are going to lead to, but this is another story.
The Apple alliance is no exception. Amazon has Bank of America as its partner to provide the loan service it has in the US, UK and Japan. This alliance allows it to issue loans in amounts of between $1,000 and $750,000. In the seven years of operation, Amazon has issued loans worth $3 billion to 20,000 SMEs KPMG says in this report.
Like these, most digital firms work with some financial partner. 26% of financial institutions are already associating with one or more technological giants, and an additional 27% assures that it is about to close an alliance in the future.
Y effectively, the announcements of new alliances follow one after another: Google recently announced the agreement with Citigroup to start next year to allow managing bank accounts from Google Pay; and Facebook has hoarded hundreds of headlines with its Libra project to make a virtual currency, in which initially involved Visa, Mastercard and Paypal.
Funcas and KPMG claim in this report that this is just the tip of the iceberg of the coming change. “ institutions that are useful to their clients they are the ones who will be able to compete in the future,” said Francisco Uría, partner responsible for the financial sector of KPMG, during the presentation of this report, where he insisted that choosing the right partner will mark the success and even survival of financial institutions.
The good news for the financial sector is that the vast majority of banks carryyears preparing for this change and devoting great efforts to its digital transformation processes. BBVA is a clear case, in which its transformation has led to the signing of alliances with both ‘fintechs’ and technology providers but also with large platforms. The best example is the case of Uber in Mexico, where BBVA directly from the Uber ‘app’ offers a current account and financing services to all the platform’s drivers. A very close collaboration of the model that is marking the ‘Big Tech Banking’.
Advantages
Yet the challenge facing the financial sector is enormous, as big tech companies have important advantages in their favour. They are global companies with a large technological mastery and much more efficient infrastructures to compete in the digital market. They also have large economies of scale but the main thing is that they are able to create very convenient and easy to use services. In short, they develop unique and differential user experiences that trap their customers and that set the level of demand for everyone who wants to compete in digital services.
This is why there are increasingly more banking users potentially willing to consider product alternatives in non-financial institutions. 4 out of 10 customers would hire financial services on Google, Amazon or Apple47% would be willing to open an account with one of these companies, being the most desired option Google (a 15%), followed by Amazon and Apple (13% and 11% respectively). Facebook is the least chosen. The Cambridge Analytica crisis undoubtedly has a lot to do with this lack of confidence.
Prificously this point, that of data protection and trust, shows where the great asset of banking in this paradigm shift can be. The great strengths of the financial sector, as highlighted in this report, are in the security, privacy and legislative compliance, “more and more important and difficult to replicate by the big tech.”
The key, this study insists, is precisely to look for the appropriate partners and create a relationship that benefit both parties. “While these changes will take time, developing solid collaboration agreements with technological giants is a positive step in the right direction that will open up opportunities for further growth and change in the future,” concludes the report of ‘Banking before the bigtech.
Originally published by: Luz Fernández -BBVA
