Will the GAFAs be our next banks?

Author: Briony Richter, Retail Banker International

Tech giants are starting to erode the boundaries between industries as they seek to provide consumers with the services they desire. Breaking into finance, the GAFAs (Google, Apple, Facebook & Amazon) have poured money into financial services such as payments and digital wallets, but will they be the next banks?
Briony Richter reports from the latest Digital Banking Club.

The first Digital Banking Club of 2018, sponsored by Intelligent Environments, discussed whether or not the GAFAs will become banks. Hosted at the formidable Law Society in London, the debate featured an illustrious panel to debate this very topical subject.

Kicking off the debate, Simon Cadbury, director of strategy and marketing at Intelligent Environments, expressed his thoughts on social media companies and search engines considering becoming banks and why this topic should be examined. He stated: “We first saw Google and Apple have a go at payments. Then we saw virtual branches on Facebook.

“For some time the thought of these tech giants actually becoming fully-fledged banks with banking licences has felt a bit farfetched, but the debate hasn’t gone away. First, Open Banking offers them an interesting route into banking and then, as if by magic, the Wall Street Journal has run a story suggesting Amazon are seriously considering becoming a bank, in partnershipwith either JP Morgan Chase or Capital One. Therefore, timing of this discussion is great and I’m looking forward to debating whether this is going to be a reality.”

The challenges and opportunities from the GAFAs

The new regulations of Open Banking are designed to encourage collaboration and competition. But will the GAFAs be the ones to harness the opportunities that PSD2 offers? Within the financial industry, payments are where tech giants could cause the most disruption to banks and other financial institutions. 

GAFAs already have a significant presence in the financial sector. Facebook is integrating person-to-person PayPal payments into its Messenger app, Amazon is now providing loans for SMEs, and Apple will allow iMessage users to send cash to each other.

Oliwia Berdak, principal analyst at Forrester and the author of a paper entitled ‘Why Google Bank won’t happen,’ explained that although some of the tech giants, like Google, will be able to offer more tailored financial tools, the likelihood of them becoming banks is small.

She said: “Amazon cannot legally become a bank because of regulation in the US, which separates commerce from banking. However, it can partner with someone in order to start offering current accounts.” Berdak continued by saying that this type of move could be wise for tech giants, not because they want to undermine banks, but because those companies are building an ecosystem of services for their customers, most of whom are merchants and retailers.

“It’s about removing friction for the customer journey, for example lowering transaction fees, lowering interchange fees, or offering global commerce payments. Amazon has to do this because without financial services, its ecosystem is incomplete.”

Incumbent banks, meanwhile, often lean on these companies for strategic digital solutions such as cloud computing. Due to regulation, especially in the US, many financial services are off limits to the GAFAs. However, more lucrative areas with lower barriers to entry – such as transaction services – may be at risk of disruption in the coming years.

Banks are increasingly becoming out of touch with an ever-growing digitally savvy consumer base. Nick Ogden, founder and chairman of ClearBank, argued that this is where the tech giants perform significantly better.

“They interact with their customers. They understand the need to interact and they also acknowledge the demands.

“Are they going to go through the pain of getting a banking licence? My strong recommendation is that there are better ways to spend your life. However, are they going to partner up and use the distribution to create a niche distribution channel to support the partnership levels of banks? I think that is highly probable,” Ogden added.

Alessandro Hatami, founder of Forestreet, also agreed that it is unlikely that the GAFAs will become banks; however consumers will buy banking services from them.

“That’s going to be the core proposition. They have very different objectives and not all of them are financial but they have closer relationships with clients.”

He added, “GAFAs will use access to existing banks to create banking propositions within their platforms that people will use.”

Hatami also stated that payments will define the future in the financial sector: “I think payments are fundamental. Without payments, banking doesn’t exist.”

GAFA partnerships

As there are rumours of Amazon partnering up with JP Morgan Chase, a poll question set to the audience asked “How would you feel if your employer was to partner with a tech giant in a white-labelling initiative?”.

Final results showed 84% of participants would be in favour of such a partnership.

Blomfield, CEO and co-founder of Monzo, was asked whether he would consider a partnership. “We wouldn’t,” he responded, “I think it speaks to the different models. We are opening around 60,000 or 70,000 current accounts a month so we can get to scale pretty quickly in the UK on our own.

“There is an adoption cycle. Our early adopters were 92% male. Then you move on to early mainstream and late mainstream. Only 40% of our customer base is in London; 60% is outside but still focused on metropolitan areas. Around 50% of our customers are between the ages of 20 and 30, 25% are between 30 and 40, and a further quarter are upwards of 40.”

Final results

At the beginning of the debate the audience was presented with the motion ‘This house believes your next bank will be a GAFA’. For the first vote, the results showed 44% were for the motion and 56% were against. After the debate, the same motion was set and the results showed a change of heart towards the GAFAs. Only 26% voted for the motion and 74% against.

Cadbury concluded: “It’s been a fantastic debate. I think we have come to the conclusion that the GAFAs are not going to become fully licenced banks in their own rights, but are likely to become white-labelled ones in select markets.

“One thing we didn’t really touch on was what banks can learn from GAFAs in terms of culture, technology, approach and strategies. There is definitely a way to go, all banks that think like the GAFAs, and become more like a tech company in that respect, will definitely reap competitive advantage over their peers.”

THE PANEL

The debate was chaired by Douglas Blakey, Editor of Retail Banker International and Chair of the Digital Banking Club. The panel included:

  • Simon Cadbury, director of strategy and marketing at Intelligent Environments. Simon joined Intelligent Environments in 2013 from Lloyds Banking Group, where he headed payments and sat on the Credit Card division leadership team. At Intelligent Environments, Simon’s role is to deliver the company’s mid and long term strategy as well as product evolution and marketing.
  • Tom Blomfield, CEO and co-founder of Monzo. Founded in 2015, Monzo aims to be the digital bank for consumers. Before founding Monzo, Tom was co-founder of GoCardless and CTO of Starling Bank. Tom was recognised as one of the top five entrepreneurs under 30 by the European Commission.
  • Oliwia Berdak, principal analyst at Forrester. Oliwia heads Forrester’s coverage of digital disruption and digital innovation within financial services. Much of her research analyses changing customer expectations, behaviours, trends and fintechs that look to capitalise on these opportunities. Part of her role is to support digital leaders to respond correctly to these changes and adapt their companies for the digital age.
  • Nick Ogden, founder and chairman of ClearBank. Nick describes ClearBank as ‘A bank for banks.’ The company offers core banking services and payment processing to fintechs, building societies and credit unions. In 1997, Nick founded WorldPay that enabled global internet transactions. ClearBank is the UK’s first new clearing bank in over 250 years
  • Alessandro Hatami, founder of Forestreet. Forestreet helps companies and executive teams to select the right partners to transform digital strategies. In 1999, Alessandro launched his first website at GE Capital. Previously, he was group innovation director and COO digital banking at Lloyds Banking Group.

 

12 Apr 2018

Author: Briony Richter, Retail Banker International

Tech giants are starting to erode the boundaries between industries as they seek to provide consumers with the services they desire. Breaking into finance, the GAFAs (Google, Apple, Facebook & Amazon) have poured money into financial services such as payments and digital wallets, but will they be the next banks?
Briony Richter reports from the latest Digital Banking Club.

The first Digital Banking Club of 2018, sponsored by Intelligent Environments, discussed whether or not the GAFAs will become banks. Hosted at the formidable Law Society in London, the debate featured an illustrious panel to debate this very topical subject.

Kicking off the debate, Simon Cadbury, director of strategy and marketing at Intelligent Environments, expressed his thoughts on social media companies and search engines considering becoming banks and why this topic should be examined. He stated: “We first saw Google and Apple have a go at payments. Then we saw virtual branches on Facebook.

“For some time the thought of these tech giants actually becoming fully-fledged banks with banking licences has felt a bit farfetched, but the debate hasn’t gone away. First, Open Banking offers them an interesting route into banking and then, as if by magic, the Wall Street Journal has run a story suggesting Amazon are seriously considering becoming a bank, in partnershipwith either JP Morgan Chase or Capital One. Therefore, timing of this discussion is great and I’m looking forward to debating whether this is going to be a reality.”

The challenges and opportunities from the GAFAs

The new regulations of Open Banking are designed to encourage collaboration and competition. But will the GAFAs be the ones to harness the opportunities that PSD2 offers? Within the financial industry, payments are where tech giants could cause the most disruption to banks and other financial institutions. 

GAFAs already have a significant presence in the financial sector. Facebook is integrating person-to-person PayPal payments into its Messenger app, Amazon is now providing loans for SMEs, and Apple will allow iMessage users to send cash to each other.

Oliwia Berdak, principal analyst at Forrester and the author of a paper entitled ‘Why Google Bank won’t happen,’ explained that although some of the tech giants, like Google, will be able to offer more tailored financial tools, the likelihood of them becoming banks is small.

She said: “Amazon cannot legally become a bank because of regulation in the US, which separates commerce from banking. However, it can partner with someone in order to start offering current accounts.” Berdak continued by saying that this type of move could be wise for tech giants, not because they want to undermine banks, but because those companies are building an ecosystem of services for their customers, most of whom are merchants and retailers.

“It’s about removing friction for the customer journey, for example lowering transaction fees, lowering interchange fees, or offering global commerce payments. Amazon has to do this because without financial services, its ecosystem is incomplete.”

Incumbent banks, meanwhile, often lean on these companies for strategic digital solutions such as cloud computing. Due to regulation, especially in the US, many financial services are off limits to the GAFAs. However, more lucrative areas with lower barriers to entry – such as transaction services – may be at risk of disruption in the coming years.

Banks are increasingly becoming out of touch with an ever-growing digitally savvy consumer base. Nick Ogden, founder and chairman of ClearBank, argued that this is where the tech giants perform significantly better.

“They interact with their customers. They understand the need to interact and they also acknowledge the demands.

“Are they going to go through the pain of getting a banking licence? My strong recommendation is that there are better ways to spend your life. However, are they going to partner up and use the distribution to create a niche distribution channel to support the partnership levels of banks? I think that is highly probable,” Ogden added.

Alessandro Hatami, founder of Forestreet, also agreed that it is unlikely that the GAFAs will become banks; however consumers will buy banking services from them.

“That’s going to be the core proposition. They have very different objectives and not all of them are financial but they have closer relationships with clients.”

He added, “GAFAs will use access to existing banks to create banking propositions within their platforms that people will use.”

Hatami also stated that payments will define the future in the financial sector: “I think payments are fundamental. Without payments, banking doesn’t exist.”

GAFA partnerships

As there are rumours of Amazon partnering up with JP Morgan Chase, a poll question set to the audience asked “How would you feel if your employer was to partner with a tech giant in a white-labelling initiative?”.

Final results showed 84% of participants would be in favour of such a partnership.

Blomfield, CEO and co-founder of Monzo, was asked whether he would consider a partnership. “We wouldn’t,” he responded, “I think it speaks to the different models. We are opening around 60,000 or 70,000 current accounts a month so we can get to scale pretty quickly in the UK on our own.

“There is an adoption cycle. Our early adopters were 92% male. Then you move on to early mainstream and late mainstream. Only 40% of our customer base is in London; 60% is outside but still focused on metropolitan areas. Around 50% of our customers are between the ages of 20 and 30, 25% are between 30 and 40, and a further quarter are upwards of 40.”

Final results

At the beginning of the debate the audience was presented with the motion ‘This house believes your next bank will be a GAFA’. For the first vote, the results showed 44% were for the motion and 56% were against. After the debate, the same motion was set and the results showed a change of heart towards the GAFAs. Only 26% voted for the motion and 74% against.

Cadbury concluded: “It’s been a fantastic debate. I think we have come to the conclusion that the GAFAs are not going to become fully licenced banks in their own rights, but are likely to become white-labelled ones in select markets.

“One thing we didn’t really touch on was what banks can learn from GAFAs in terms of culture, technology, approach and strategies. There is definitely a way to go, all banks that think like the GAFAs, and become more like a tech company in that respect, will definitely reap competitive advantage over their peers.”

THE PANEL

The debate was chaired by Douglas Blakey, Editor of Retail Banker International and Chair of the Digital Banking Club. The panel included:

  • Simon Cadbury, director of strategy and marketing at Intelligent Environments. Simon joined Intelligent Environments in 2013 from Lloyds Banking Group, where he headed payments and sat on the Credit Card division leadership team. At Intelligent Environments, Simon’s role is to deliver the company’s mid and long term strategy as well as product evolution and marketing.
  • Tom Blomfield, CEO and co-founder of Monzo. Founded in 2015, Monzo aims to be the digital bank for consumers. Before founding Monzo, Tom was co-founder of GoCardless and CTO of Starling Bank. Tom was recognised as one of the top five entrepreneurs under 30 by the European Commission.
  • Oliwia Berdak, principal analyst at Forrester. Oliwia heads Forrester’s coverage of digital disruption and digital innovation within financial services. Much of her research analyses changing customer expectations, behaviours, trends and fintechs that look to capitalise on these opportunities. Part of her role is to support digital leaders to respond correctly to these changes and adapt their companies for the digital age.
  • Nick Ogden, founder and chairman of ClearBank. Nick describes ClearBank as ‘A bank for banks.’ The company offers core banking services and payment processing to fintechs, building societies and credit unions. In 1997, Nick founded WorldPay that enabled global internet transactions. ClearBank is the UK’s first new clearing bank in over 250 years
  • Alessandro Hatami, founder of Forestreet. Forestreet helps companies and executive teams to select the right partners to transform digital strategies. In 1999, Alessandro launched his first website at GE Capital. Previously, he was group innovation director and COO digital banking at Lloyds Banking Group.