In this series, I’ll look at how large technology companies are breaking into the financial services sector. We’ll explore the potential future for this expansion and how it’s affecting the fintech world. Later, we’ll look at how it sets the tone for consolidation across unrelated industries, and how techfin is shaking up major players in the finserv world.
Techfin: Big tech’s charge into financial services
Historically, big tech, a term used to refer to huge technology companies like Apple, Google, Amazon, Facebook, and Alibaba, has stayed in its own lane by tackling different pieces of the digital stratosphere. Google handles search, Amazon and Alibaba e-commerce, Facebook social connection, and Apple the devices on which people conduct their digital lives. Recently, however, big tech has slowly edged itself into the realm of fintech startups and financial services industry disruptors. This phenomenon, called techfin, is when large tech companies launch financial services initiatives and projects. Big tech companies have the resources, the talent, and the digital pedigree necessary to create well-designed digital experiences that consumers value that they will leverage to offer quality financial products. They often have a loyal customer base to market new digital products to as well.
Technology designed to improve the efficiency and effectiveness of financial services institutions and their delivery of financial products.
Fintech products launched by large technology companies with no historical experience in financial services.
I’m not here to issue hyperbolic, click-hungry statements regarding the end of the fintech era. Fintech is very much alive and investment in the sector continues to grow, with South America, Africa, Southeast Asia, and Australia experiencing rapid investment growth. All told, fintech remains a cutting-edge technology that forces the rapid transformation of the financial services industry.
But the rise of techfin means that fintech’s incumbent financial institutions will have to make hard decisions regarding business strategy. Should they partner? Should they refuse investments to maintain the independence of their ventures? Time will tell, but there are multiple routes to take.
The way forward for techfin
There are multiple ways big tech can compete with the financial services software world, including fostering partnerships, making investments, and creating relevant software for popular products with existing fintechs.
Fintechs are seeking partnerships with big tech companies, and big tech is happy to partner with them. The future of fintech looks messy, with fintechs closely intertwined with the partnerships they form with big tech companies. Large technology companies gain the financial services expertise held by fintechs and the connections they often bring with them. Fintechs get the nearly limitless well of resources that big tech has access to and the ability to think huge in terms of product enhancements as well as scale. For fintechs, partnership will typically come with a significant reduction in autonomy, but the potential reach of their technology is greatly enhanced. Some fintechs, like N26, a digital-first European bank, are still looking to disrupt the traditional partnership model by going it relatively alone. N26, recently launched in the US, is a legitimate challenger bank, eschewing potential partnerships that they’d be unlikely to control in favor of a studied approach to drawing customers away from big incumbent banks.
The only alternative for big tech is to sink resources into developing their own financial products. It’s a far better idea to partner with existing fintechs that know the industry well. Forming partnerships is a core business practice of most big tech companies; think of how these companies started and the diverse array of industries they now operate in. Amazon started as a bookseller, and now is...Amazon, getting to where it is thanks to the efficiency of its supply chain and positive digital experiences. Big players like Amazon have the talent, the money, and the vision to make a significant play within financial services. We’ll see if they do.
The most unobtrusive way big tech companies break into financial services is by building a financial component into their existing technology. This makes a service sticky, delivering native functionality in a platform with a huge user base.
For example, WeChat launched its WeChat Pay feature by making it the main modality by which Chinese users gave gifts during the Chinese New Year. It called it the "red envelope" feature, mirroring the traditional red envelopes people give each other to celebrate the Chinese New Year. This launch was significant because WeChat boasts over a billion monthly users, out of around 1.4 billion Chinese people. 900 million of these users are now relying on WeChat Pay for payments. The WeChat example is a great one to highlight the ease with which a sensible product addition to extend the capabilities of a highly used platform can proliferate.
Apple Pay is another fantastic example of big tech expanding into financial product offerings. Launched in 2014, the cashless payment technology has made merchant payments easier than ever before. Amazon launched similar initiatives in the United States with Amazon Cash. The distributor has also issued over $3 billion in small-business loans. Amazon isn't quite a bank, but all signs point to it becoming a modern financial institution.
Google, Amazon, and Facebook—among other tech giants—are all making significant bets on fintech. In 2018, Google’s parent company, Alphabet, made 14 fintech investments, Salesforce made 10, and Amazon made 6. These investments are significant, demonstrating the focus big tech has started to place on financial services.
After all, big tech has billions to spend, and their investments spread widely over the fintech space. Amazon, for example, has started offering product insurance and has backed insurtech providers in India and the United Kingdom. This will only continue as it looks to be the place for, well, everything. Regtech investment is also likely on the horizon, at the very least as a means to mitigate risks internally during the expansion to financial services.
Amazon's Whole Foods investment seemed a bit unusual until you realize its goal: leveraging its distribution power to become a major player in food services. Amazon’s expansion into financial services makes even more sense. It's tying products into the Amazon ecosystem to make itself the only stop for products.
Last year, Google invested in Applied Systems, one of the leaders in insurance technology, and plans on increasing its investment in the insurtech sector. Investments are a way of leveraging relationships built by the investment into a fruitful partnership, and the potential for an acquisition down the road. Expect big tech to increase their investments in fintechs in the future.
Big tech’s plans for financial services
Until now, big tech’s interest has been in the mobile payments space. Product development has focused on ways to integrate peer-to-peer payments into existing messaging platforms. This is the natural next step into diversifying product offerings with financial services, but I expect an expansion into tangentially related fintech categories will occur in the next few years. There has been speculation about big tech opening a bank in the near future. Many in the industry speak about it as a certainty rather than a possibility.
As mentioned before, Amazon is now offering small-business loans. This move has the potential to cut into banks' profit centers, as loans have historically only been provided by traditional financial institutions and services. Amazon will lean on its proficiency in creating digital experiences to distinguish themselves from these traditional banks.
Big tech is taking over the world. Not quite, but the reality is not far off. Large technology companies have the resources to strategically invest in potential growth areas. Financial services are key to enabling that, and would give companies that expand carefully unprecedented power. We’ll be keeping a close watch on developments in the space as techfin grows.
Patrick is the manager for the verticals and tech teams as well as G2's fintech and legaltech analyst. As a G2 analyst, Patrick focuses primarily on the fintech and legaltech spaces in addition to a slate of other vertical categories. Fintech's explosion in popularity has created a compelling challenge to accurately represent the spaces on G2 and produce high-quality, relevant content for external consumption. Patrick leverages his relationships with vendors, the unique data that G2 has accrued via more than 1 million user-generated reviews, market surveys, and product data to produce insightful reports and thought leadership content within his two focus spaces.