30 March 2020
How bigtechs are changing the finance world
Open Banking is unquestionably beneficial to customers, as it will lead to new functionalities and products that boost convenience and relevance. It also attracts bigtechs to the financial market. The giants are boosting innovation and efficiency, but their size, financial strength, IT expertise and reach make them a serious competitor for banks. In this blog Aurélie Fon, Product Marketing Manager Digital Banking at equensWorldline, outlines the influence of bigtechs on the financial market and how banks could deal with this.
Tom Goodwin said once: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.” But what if the next-gen global bank does not own any financial products?
Google is now offering payment accounts (with Citibank), Amazon is hyper-focused on developing financial products (with JPMorgan) and Apple has successfully launched its Apple Card (with Goldman Sachs). And Facebook did not stay behind, with already more than 120 patents in Wealth Management and its Libra initiative.
It is clear that bigtechs have started to play with payment services, without directly competing with the historical activity of the banks. For the time being, they prefer to reuse existing bank assets instead of building up their own bank. But for how long? While bigtechs may not be building the next generation banks, they are gradually finding their way in the industry and locking in users into their ecosystems to eventually fully own the customer relationships.
During the following years, platforms from various providers will get richer and will consolidate – regardless the industry. Platform models have strong positive network effects, and this demand-side economy of scale will progressively give advantage to a few large platforms. Taking a look at the two main ecosystems in China, Alibaba and Tencent, it seems obvious that platforms are not just competing in an ecosystem, they basically are the ecosystem. And those Chinese bigtechs are now expanding their influence in Europe – such as Tencent which has recently invested in Qonto, Lydia and Klarna for example. In this changing environment, financial institutions must find a new purpose to avoid becoming irrelevant as happened in China, where more than 90 percent of mobile payments now run through Alipay and WeChat Pay.
Established banks are wondering how to build platforms and what to put on it. Alongside with their digitization, they must now compete against tech giants in platform markets they know nothing about. They need easy-to-use and reliable APIs to give their partners and developers the opportunity to create new applications and services. This also involves consulting the fintech community for inspiration and co-innovating with new players on digital business applications that can help maintain a competitive advantage and improve customer engagement and satisfaction.
The shift from relationship banking to multi-brand eco-systems will not be without challenges, and established banks should take advantage of their financial or niche expertise. This will enable the bank to develop and distribute niche products in the financial market through own- and third-party channels (Bank as a Service). Another option is to actually build strong and comprehensive ecosystems with which they establish customer relationships by merging services from external suppliers. In this way they can ensure relevance to their audience.
There are still many question marks regarding ecosystem models and financial institutions will have to show twice as much talent, ingenuity and determination to withstand fierce competition from non-traditional players and bigtechs. Established banks should start thinking carefully about their future role in those ecosystems, asking themselves the right questions to find the right audience and the right partners in the broad spectrum of the fintech field, so that they can lay the foundations for their API-driven strategies.
Although the future is difficult to predict, one thing is clear: the next major battleground will undoubtedly be about customer experience(s), and market players must now ensure they move their services to the interfaces their customers prefer. If banks adopt a proper API-driven strategy, there will certainly be a significant piece of the pie left over for them.