Rather than allow big tech companies to pose a threat to their business, big retail banks are teaming up with them. Ouida Taaffe looks at what each partner brings to the relationship, how they’re working together and who the disrupters of the future might be.
Big tech could pose a serious competitive threat to retail banks. Large tech companies like Amazon, Google and Apple bring size, slick interfaces and excellent analysis of the oceans of data that flow through them.
They also have an existing, and deserved, reputation for focusing on the customer. Many are also trusted. And aspirational brands play a big role in the everyday life of millennials and digital natives.
Incumbent retail banks, in contrast, do not score as well on those fronts, although the big banks and leading fintechs are beginning to change.
The one clear advantage that banks have is that they have been holding customer financial data for many decades, understand the context of that data and are trusted to take care of it.
Unless consumers use open banking to give third parties permission to access that – which only around 1m people in the UK have done to date – big tech does not have real insight into consumers’ financial health.
Why, then, are banks increasingly partnering with big tech companies? Goldman Sachs, for example, was recently reported to be working with Amazon on providing loans to small businesses in the US. Bank of America is said to have started working with Amazon in 2018.
“What do banks get out of working with firms like Amazon? They get access to a giant marketplace that transacts big – some 200m products were sold via Amazon on Prime Day 2019 and that number is expected to grow in 2020,” says Sankar Krishnan, executive vice president in the banking and capital markets division of Capgemini.
“Banks have a weighted average cost of capital of circa 4.5%. If they lend to big companies like Walmart, they generate margins of around 25 to 50 basis points (bps). So, the larger commercial banks typically make money by lending to the small and medium suppliers of a company like Walmart. Working with a platform like Amazon would make it much easier for a bank to reach many more SMEs.”
What’s in it for the big tech?
Amazon, Krishnan says, would benefit from being an aggregator of demand for financial services. And not just lending, but also banking transaction services.
They could do that “without having to incur significant costs or take risks with building core banking functions like compliance. Nor do they have to become a regulated financial institution”, says Krishnan.
Amazon does provide merchant loans to SMEs on its site, but it is reported to have struggled with bad debts because its view of the SMEs was too limited.
“Working with a bank gives it a huge opportunity to help sellers on its marketplace lower credit costs,” says Krishnan. “As the seller gets more sophisticated it can help them with FX, payments, cash management, trade services and so on. Again, a good commercial bank can run all of this really well as a portfolio program and manage risks a lot better for Amazon.”
Will open banking allow big tech firms access to enough data to improve their credit risk analysis without partnering with a bank?
“It is entirely possible,” says Krishnan “but given that banks have already built these checks and balances and have a 100-year track record of doing it right, it would be reinventing the wheel for Amazon to do it.”
What Amazon brings to the table, Krishnan argues, is managing the physical supply chain “in one click”.
“The world is moving towards open online marketplaces,” says Krishnan.
“Banks and fintechs will provide a range of specialist financial services inside these marketplaces. A bit like ‘Intel inside’ – the hardware plumbing of computers that most people take for granted – banks and fintech will be ‘money inside’ big online platforms supporting services like payments or market making.”
Krishnan believes that Amazon will have a major role to play in retail financial services. However, it will not be the only big tech that enters the sector, he says. “Big tech is already in financial services,” he says. “Just not as a bank.”
Krishnan also expects big tech to partner with banks, not dominate the sector. “Some banks like JP Morgan are preparing themselves to be a disruptor too,” he says.