Bill Murray, senior researcher and advisor at Leading Edge Forum, discusses how the digerati have become competitors to banks and what to do about them.
The digerati are taking bites out of the banking sector, offering payment services, loans and credit, cash and savings products to the under-banked. Amazon is increasingly referred to as a ‘tech banking’ firm. Amazon Pay has evolved to include a digital wallet for customers and a payments network for both online and brick-and mortar merchants. With Amazon Go’s “Just Walk Out” technology – It will grant access to the store and allows customers to grab-and-go without needing to physically check out to pay for products.
Amazon Cash fits neatly into Amazon’s strategy of appealing to underbanked and unbanked populations, allowing users to deposit to their
Amazon.com balance by showing a barcode when paying cash at checkout locations, so they can shop at stores without a bank card. A partnership with Coinstar kiosks will extend Amazon Cash’s reach into rival stores. Amazon Lending offers its online sellers loans to cover working capital at rates that are typically less than a credit card. It also services the consumer market with store, debit and credit cards. The Amazon Reload digital debit card has features that challenge credit cards. Amazon is offering Finance-as-a-Feature.
This rapidly growing phenomenon of “tech banking,” where eCommerce giants provide financial services, was born of three effects. First, the financial crisis, which had an adverse impact on trust in the banking system. Second, the spread of mobile devices, which reduced the advantages of physical distribution that banks previously enjoyed. Third, the demographic shift to millennials, who are more open than the older generation to financial services from non-traditional financial services firms.
Established banks make small or negative margins on serving most small businesses, so they cherry-pick customers, creating an under-banked market. Now that sophisticated analytics is mainstream, lending and payment opportunities are moving to the firms that have the best data on customers. That used to be banks, but now it is eCommerce companies – digerati – like Amazon, Alibaba and PayPal, whose payment processing capabilities can underpin ‘tech banking’. Their customer data is more relevant, granular and timely. They can see minute-by-minute metrics, cash flows, shipping profiles, product accuracy and customer satisfaction. Best of all, clients who have credit lines with these firms spend more than those who don’t, so even low-margin tech banking is worth it.
The Digerati are cleaning up
The digerati are eating into the traditional banking market at a scale any fintech organization would die for. Net interest income constitutes the majority of revenues in the banking sector, and this is where Amazon stands out compared to most of its tech counterparts. From launch in 2011 to June 2017, Amazon reported it issued $3B across 20,000 business in the US, Japan, and the UK. The bulk of growth in the last year has been to businesses in the US, where the company originated $1B in loans in 2017 alone. Amazon Loans has enabled SMEs to grow sales by an estimated $4 billion. More than 20,000 small businesses have received a loan, and more than half of those have taken a second loan from the company. Loans range from $1,000 to $750,000 with interest rates between six and 14 percent. Amazon Payments, with 33 million users in 170 countries, is catching up to credit cards, and PayPal is already ahead of Apple Pay, Google Wallet and the rest. Patents indicate that Amazon is thinking about the future of payments in terms of facial identity and selfies as a means of quickly paying. Payments is an efficiently served market, but not to a challenger with Amazon’s superior levels of efficiency, product integration and customer engagement.
But the Asian digerati are ahead of Amazon. Ant Financial, the finance arm of Alibaba (and formerly known as Alipay), is valued at around $60 billion. It offers payments, personal lending, banking products, savings products, and peer-to-peer lending.
Alibaba’s four-year-old Yu’e Bao fund, a repository for leftover cash from online spending, is the world’s largest, with $165.6 billion under management. Ant Financial moved into fund management when it spotted the growing piles of cash in its customers’ accounts that are used to pay for everything from coffee to taxis to fridges. By sweeping the money into a money market fund, Ant Financial is able to offer a return on surplus funds better than the banks. Customers have responded by taking their money out of bank accounts and placing it in their Alipay digital wallets.
In theory, the next step for any of these organizations would be to acquire a banking license, and the quickest way for them to do that would be to buy a traditional bank. Not only would they get the license, but they would be buying a customer base that could bring a significant credit card portfolio. Owning more of the card payment’s value chain would provide them with an opportunity for cost reduction and even more data about customer behaviour – a vertical integration play in card payments. They would also get the capability to manage the deposit base they have already accumulated. However, it is less likely that Amazon is building a bank than focussing on building financial services products that increase participation in the Amazon ecosystem.
Banks do not need to fear being different
Banks have significant advantages over would-be competitors. A bank is highly regulated; it holds a grip on credit issuance and risk taking; banks are by far the biggest repository for deposits (which customers still mostly identify with their primary financial relationship); they are still the gateways to the world’s largest payment systems; and they still attract the bulk of requests for credit.
The tech bankers know how to win in a digital world, but traditional banks with their legacy loan books, branch networks and systems can win, too. It’s about how to utilize those assets alongside advanced digital capabilities to outmaneuver the tech bankers: product innovation, technology innovation, relationship change, incubate, partner, venture, acquire. These are all possibilities, but only by taking a measured approach to understand the value that exists within those assets already.
Banks and other financial services firms are systemically important to society, which is one of the reasons they are regulated so highly. However, they fall short of meeting the financial services needs of the underbanked, which are whole sections of business and society. The ‘tech bankers’ are increasingly meeting those needs, albeit to drive up participation in their own ecosystems. As banks look to shore up profits by diversifying they will inevitably compete with the tech bankers, but they can’t do that by copying them; they will have to out innovate them.
About the Author
Bill Murray is a Senior Researcher and Advisor for Leading Edge Forum. His IT career spans over 30 years, with 16 years as a Founder and Partner of Differentis, providing strategic IT consulting services to many industry sectors. Bill has experience of developing Digital and business technology strategies, business cases and change programmes involving technology disruptions such as consumerization, analytics and cloud-based services. Most recently, Bill has been helping clients develop IoT enabled business propositions and services in Connected Health, Connected Insurance, FMCG and supply chains, and advising on IoT platforms.
Bill is a chartered engineer by background and started his career with Arup in high energy impact analysis in the nuclear and automotive industries.
