Big tech companies are expanding their financial services offerings across the globe, but the landscape and opportunities differ depending on the region.
Europe, with the regulator-driven advent of open banking, is seeing a slow influx of big tech companies expand into financial services. Asia has seen more aggressive expansion due to the proliferation of mobile technology, friendliness of
regulators, large number of underbanked individuals, and consumers’ willingness to use digital financial services.
Big tech’s jump into financial services may seem odd and fairly sudden, but enabling customers to move and manage money within big tech products is a smart way to entrench a brand in consumers’ lives. The end goal would be to own all things digital, so that every single revenue generating consumer activity within the digital stratosphere is facilitated by big tech companies.
According to a Bank for International Settlements (BIS) report, 11.3% of large tech companies’ revenue comes from financial services; that’s a relatively small portion. However, given the size of big tech companies it’s not insignificant, and many are actively expanding their financial services offerings. Big tech companies offer various financial services; the most popular are payments, followed by credit lines, money market funds, and insurance.
Techfin’s expansion into Europe
The financial services market in Europe is firmly established, which makes techfin's expansion difficult. Fintech in Europe has experienced a large influx of funding for financial services expansion. In other words: It’s easier to be competitive in markets with less extensive financial services infrastructure. Regions with large swaths of financially underserved individuals—such as Southeast Asia—benefit when financial institutions bring digital products to customers’ doorsteps to bridge the gap for these individuals. In Europe, the landscape is a bit different. European regulators have launched multiple disciplinary actions against Google for violating antitrust laws. Additionally, there are pending investigations against Amazon, Facebook, and Apple for various privacy, data sharing, and anti-competitive business practice violations.
The climate of distrust that surrounds big tech in Europe makes financial product launches a bit dicey. Not only do they have to compete with incumbents, but the political weight of suspicious regulators and the momentum of upstart fintechs make expansion into new markets difficult. Nevertheless, big tech is still making slow moves into the European market. Google is licensed as an account information service provider (AISP), meaning the company can retrieve account data provided by financial institutions. Google is also a licensed payment initiation service provider (PISP). This is a type of open banking designation that allows the company to initiate payments in or out of user accounts. Consumers must opt in and authorize connections, being made aware of precisely what happens and what data the involved parties have access to. So far, no other big tech companies have been given this type of license in Europe other than Google.
Two types of payments
The first type of payments expansion that big tech companies offer is an overlay system, which relies on existing payment rails and infrastructure to carry out transactions. (PayPal, Google Pay, and Apple Pay are all examples of an overlay system.) The second bucket of solutions includes WePay and Alipay, which rely on proprietary infrastructure but still use banks to settle transactions.
|Overlay System||Proprietary Infrastructure|
|Relies on existing payment rails and infrastructure.||Relies on proprietary infrastructure, uses banks to settle transactions.|
Understanding these two structures is important because they illustrate how reliant they both are on incumbents’ technology infrastructure. The only way to completely cut out banks and existing financial institutions would be to secure a banking charter or exert sufficient political pressure on regulators to allow banking activities by non-banking institutions. The likelihood of that happening is slim, and any ethical financial regulator would uphold the rigorous standards required to participate in banking activities. Because of this, big banks are likely to stay in the picture as a necessary third party.
Techfin in Asia
Techfin’s growing importance in Asia is clear, and the launch of the first major techfin conference in the region, Techfin Asia, confirms that. The conference, which will be held next month, will focus on the phenomenon of big tech companies’ opportunities in financial services. Techfins own the online payments space in Asia, with Alipay and Tenpay accounting for nearly half of the market and almost the entire Chinese market. Smartphone proliferation and the relative ease of financial product delivery, combined with the early establishment of Alibaba’s financial services arm, Ant Financial, and Tencent’s WeChat Pay has led to the normalization of techfins in the region.
Amazon in India
A prime example of international techfin is Amazon’s multi-faceted financial services offerings in India. The tech giant made seven of its eight fintech investments in India in 2018; further, Amazon is looking to sink $7 billion in the country over the next five years. Amazon wants to establish itself as the payments leader in India, and has already made many strides toward achieving that goal. The depth and breadth of their payments investments and expanded services, including Doorstep, a cash pickup service to facilitate the use of Amazon Pay, along with their intention to increase investment in their Indian digital payments business all support this endeavor.
The makeup of techfin’s takeover
The takeover of big bank market share doesn’t necessarily look like a coup. We won’t see an army of plaid shirts accented by Patagonia vests marching through the golden double doors and onto the pristine white marble floor of the big bank, screaming for the CEO to hand over the keys. Instead, it’s the gradual, silent change of the existing banking infrastructure to digital banking options, grabbing a small handfuls of space on customers’ devices one feature at a time; first payments, then lines of credit, investment products, insurance, and personal and business financial management tools. Every type of financial product is up for grabs, as banking as a service becomes ubiquitous and tech companies are able to leverage those platforms to provide the robust architecture necessary to offer customers fully fleshed out financial services.
As I mentioned in previous editions of my column, the end result will likely be a combination of partnerships between big tech companies, fintechs, and banks that are able to bring embedded, well-constructed digital financial products to their customers.
Big Tech's Foray Into Financial Services
What Are the Advantages of Open Banking?
Fintech's Expansion to Serve the Underbanked