What will Google or Amazon do in Financial Services? They have the capital. They have trusted platforms with reach. They have formidable access to data on customers, channels, and transactions. They are active investors in FinTech and frequent collaborators and cloud services suppliers with innovative firms such as Goldman Sachs and Fidelity. Where, then, is the change likely to be and how?
It’s a popular topic in Fintech
Let’s start by being clear about what we mean by Financial Services Institutions (FS). Here we mean FS as consumer banks, wholesale banks, asset managers, alternatives such as hedge funds and PE as well as insurance companies. It’s a big industry with consumer and wholesale dimensions as well as functional sectors such as payments, risk, markets, and transactions.
As we are speculating on digital transformation let’s hold to this wide definition of FS. In the digital world the micro and the macro are more common companions. One can look at a central bank rate hike and have detailed input on how many people are shopping online or in shopping centres. Structured data is linked to unstructured. We can be more expansive on workflow and the value chain. Uber doesn’t own cars and AirBNB doesn’t own rooms so maybe in our exploration of FinTech we can imagine curators, orchestrators, and brokering without always needing to own the parts or be subject to heavy regulation.
We can also assume that any strategy into FS will do no harm to the existing core. Google and Facebook make their money today from digital advertising and together command 77% of that market. Thus they will not do anything that harms today’s source of cash and growth.
We can also assume that any strategy into FS will do no harm to the existing core. Google and Facebook make their money today from digital advertising and together command 77% of that market. Thus they will not do anything that harms today’s source of cash and growth. Amazon’s core is from product and service sales so we can be sure that will influence their choices in FS. Further whatever any large cap tech does it will need to contribute to their goals of a Trillion dollar valuation and beyond. In the world of Google for example, financial services will compete with other big impact ideas such as drones, maps, cyber security, suite of office tools etc.
Google and Amazon have been more measured in FS than their Asian counterparts. Google Wallet is clearly just the start and we can imagine payments going through further upheaval with the implementation of PSD2 and the changing power dynamic between the bank, the merchant and the customer.
Techs in Asia are moving even faster. Alibaba got into the Asset management business and raised $81B in 9 months partnering with Tianhong. We should pay close attentions to TenCent and Ant Financial especially with their newly launched financial market places (Licaitong and Caifu Hao respectively). These are among the more innovative digital platforms targeted to mobile millennials.
In M&A there are an estimated 30-40 FinTech Unicorns that might meet the scale objectives of Amazon or Google.
In M&A there are an estimated 30-40 FinTech Unicorns that might meet the scale objectives of Amazon or Google. The valuations are indeed high. They also have the cash to buy most banks given current valuations. Unclear why they would want the legacy infrastructure – why not let the FS own ‘manufacturing’ while others go after higher margin distribution and servicing? Thus we expect Google and Amazon to continue to wear the hat of orchestrator, investor and partner looking more for incremental growth.
Target themes for expansion and acquisition
Payments have been the area of early investment and progress.
- How long before Amazon, Google, Apple start to leverage the analytics that come with payments flow and progress predictive modelling, customer credit, and credit monitoring? The capabilities are underway as Amazon Pay Wallet looks to clone EBay and Alipay as alternative nonbank payment portals.
- PSD2 – will the Internet giants use this as a means to be the customer interface to banking with the banks becoming the plumbing – similar to what happened in telecoms. Would one of the large Caps once again go after Square or Stripe?
- Speculation: If Google or Apple gathers European users banking info via API, why would one ever login to their banks’ apps? It would be so much easier to speak into Siri, “What is my balance?, transfer $X from checking to savings, etc.”
- Remittance: Similar to what Alibaba has done with MoneyGram. A lucrative sub sector among the huge FS. There are many approaches to pick pieces of the payments space.
Wealth management/asset management, particularly in a world where AI becomes more prevalent in asset management. There are many scenarios including Google as a financial search engine used to channel Asset Managers. They could sell data to financial services firms as well but again this could harm the core business if not done properly. Large Cap Techs have an implicit and explicitly trust with user data. While they can get permissioned by users they have an accountability and trust that influences all strategic decisions.
- We think this marketplace/distribution channel angle could go further than just wealth/asset management. Similar to what Ant Financial and Tencent did in Asia, this can be a financial product marketplace. In addition to ETFs/mutual funds, Google or Amazon can be a search or recommendation engine for credit cards, personal loans, mortgages, etc. Again this approach is working rapidly with millennial who are open to non-traditional financial platforms.
- We do not see tech companies using balance sheet to issue loans/cards. It is more likely that they play role of broker and leverage client data to curate products that meet one’s financial needs. Note: To pull this off, clients will likely have to opt-in and provide more data on finances, objectives, and risk tolerances. We do not think it can be done effectively just using the data Google and Amazon capture today.
Business lending – using the analytics to provide more competitive and intelligent financing solutions, particularly to the online merchants. Google could bring a new dimension of analytics to the table using partners such as CargoMetrics or Credit Karma. These types of digital platforms can address two issues that have plagued the legacy credit sector credit. Credit risk background and monitoring. On the former, Credit Scoring is a sub industry with room for improvement. New sources of information from social media, correlation of educational background, collateral and other even crowd sourcing can lead to faster, more dynamic and more accurate credit profiles. Eventually creating crowd sourcing but also a secondary market for syndications and securitization.
- Similar to the consumer financial product marketplace mentioned above, couldn’t they do something similar with small to mid-sized businesses? If they capture information on SME businesses’ financial condition, accounts payables/receivables relative to credit terms, inventory aging, etc., Google or Amazon can then orchestrate potential business loans that are favourable to the business. We think this could be relatively easier for Amazon since they act as re-seller and fulfilment provider for many SME businesses today through its retail marketplace. They already have the community/network; this would just be an extension of services provided to those SMEs.
Beyond these target themes of acquisition is the underlying growth strategy for the large Cap Tech firms. We see determined efforts to reach out and engage smaller early stage firms through investment as well as collaboration. We also see several strategic questions now and going forward. These questions include:
- How well will these firms manage B2B opportunities? Comments: one of the key differences in B2B is the service and support requirements that are more difficult to scale than B2C. In other words one cannot simply down load an app to a bank operator instead you will likely need boots on the ground which is hard (but not impossible) to scale.
- Will they combine balance sheet risk with operation cloud based services?
- Will they invest in content and own it or play the role of network orchestrator with a series of alliances and APIs? Can they broker or orchestrate resources without owning it?
A final thought
Decades ago Walter Wriston, CEO of Citibank said:
Information about money is indeed more valuable than money.
“Consider the huge industries already built around this premise. There are more index funds than there are stocks. There is more money speculating on goods and services than there are actual goods and services. In other words the notional global derivatives market (a series of bets) is 10-20 times larger than the combined Global GDP of actual value creation. Information about money is indeed more valuable or as valuable as money. Information empires need to be both offensive and defensive in their provision of financial information and services. Welcome to Banking!”