COVID-19 has changed banking, possibly for ever. But as banks wrestle with the pandemic and its after-effects they must also focus on a bigger imminent threat to their existence – and it’s not from FinTechs.
Among the many impacts of the global pandemic has been a significant shift in the way consumers and businesses go about their banking. Mothballed branches and social distancing have accelerated the use of online and mobile banking driving what McKinsey has found to be a 20% increase in ‘digital engagement’
and a 50% decline in the use of cash.
Many may be surprised that these moves have not benefitted Fintechs, but, according to data from Finbold
, downloads of fintech apps have actually fallen during the crisis with leading challenger banks Monzo and Revolut both seeing slides of around 20% in March. This confirms what I have suspected: the FinTech threat has always been a distraction from the real challengers to today’s banks.
That threat comes from ‘Big Tech’; Google, Amazon, Apple, Baidu and Tencent among others. These huge and wealthy businesses are already deeply integrated into the lives of consumers and businesses. The top 20 tech firms are valued at almost $6 trillion, getting on for double that of the top 20 financial services firms at $3.3 trillion
. They have the money, the ambition and the technology to completely change the face of banking in ways that fintech could not. They can do it almost overnight, and they are preparing to do so now.
The power and wealth of Big Tech is virtually unlimited. They can disrupt and dominate whole economies with digital platforms that touch every aspect of our lives. Data fuels their business models as they seek to understand and monetise every aspect of individuals’ behaviour. Collecting, acquiring, owning and processing data is the modus operandi of Big Tech. The list of industries up-ended by these behemoths grows daily; music, publishing, retail, gaming, film, communications already with transport, healthcare, education and even government now feeling their impact.
There is no doubt that banking and financial services are next on the list. Chinese technology firms are already deeply engaged in financial services. Social Media leader Tencent already derives 28% of its revenues from payments
. US firms are beginning to see the benefits and to provide their users with payment services. Google, Apple, Microsoft and Amazon are looking beyond on-site digital payments to take definitive steps into financial services. Apple has launched a credit card which can be opened within 30 seconds; Google is launching a current account
and Facebook is trying to develop its own digital currency.
The threat from big tech is not new, but it is rapidly sharpening, driven by both by investor demands and by the fallout of the COVID crisis.
Traditional banks’ room to maneuver is severely constrained by the increased risk and responsibilities deriving from their role in restarting economies post-COVID. Concerns about the risk attached to government-mandated business loans are widely voiced. Business risk stems not only from defaults, but the resource intensive, logistically challenging and expensive efforts to secure repayments. COVID-19 loans threatens to become a ‘PR disaster’
as they erode trust and reputation of banks forced to chase small businesses for repayments they cannot afford.
Big Tech, by contrast has had a good COVID crisis. As millions have suffered lockdowns and been forced to work, shop, socialise and entertain themselves from home, not only have tech firms seen revenues rise, but they have cast themselves as consumer champions. The ‘tech-lash’ which saw trust in tech erode towards the end of the last decade, seems to have evaporated.
There is a clear and present danger to banks and the shape, ownership and purpose of the Bank of the Future hangs in the balance. The combination of the growth in influence, spending power and ambition of Big Tech, with the dislocation of the economy caused by the coronavirus pandemic, creates a dangerous scenario for banks. The window of opportunity to transform and meet the evolving demands of customers has all but closed. Bold thinking and decisive execution are needed now if banks are to survive in positions where they can shape their own future.
The coming battle will be about data. Banks have it, Big Tech covets it. The side that is best able to protect, understand and utilize it as an asset will prevail. Data is both the prize and the key to success in this battle, and my next article will outline how banks can value and leverage the data advantages they have to win this war.