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Expert views

As the financial services industry and Fintechs work ever closer, where does that leave BigTech?

Collaboration between the financial services industry and FinTech ventures continues to gain traction, opening up exciting opportunities for both. The rapid progress being made in areas such as big data, artificial intelligence and machine learning is increasingly being seen as an opportunity rather than a disruptive threat. Working in partnership enables the industry and its customers to benefit from the latest innovations while giving fledgling technology firms access to the financial strength and scale needed to commercialise their bright ideas.

Many financial services firms are also making targeted acquisitions in the sector and investing heavily in developing ‘home-grown’ capability. With the industry increasingly embracing FinTech, what does that mean for the long-talked of push into financial services by BigTech players such as Google, Apple and Facebook? Although some BigTechs have established payment services they are still largely reliant on using traditional banking partners. If financial services firms and FinTechs are able to successfully lever their combined strengths by working together, how will that impact on BigTech’s prospects for establishing a major presence in the sector? Could they still achieve that alone or would they need to also work in partnership and with whom?

As financial institutions and FinTechs work together more closely, they are creating superior customer experiences and taking innovation in a new direction. Predictions that bank clients would switch from financial institutions to FinTechs were overestimated and FinTechs also realised that creating new infrastructures is difficult. It is much easier for all parties to work together.

To be successful in financial services, new FinTech entrants must fulfil many requirements, including bringing sufficient value add, marketing their product and proving they are a credible and robust alternative. If a new entrant’s product does not deliver sufficient value add, customers will not adopt it. Even if a new entrant has a great product, it also must get that product to market, informing its potential customer base of the features of the product. That is not easy and is a reason that many FinTechs struggled to gain traction. In partnership with a bank, however, a FinTech can market its product to the bank’s customer database. New entrants often emerge from nowhere and therefore must work hard to gain credibility among customers. Finally, solutions must be robust enough to cope with the massive volumes experienced in the banking industry. A new entrant may have a great idea, but without these other requirements, getting customers to switch over will be challenging.

To compete with BigTechs, banks must ensure they maintain direct relationships with their clients, providing sufficient value to prevent them from going to the BigTechs for all their financial services needs. By knowing their customers, banks will be in a better position to respond to their customers’ needs and remain the ‘front door’ to financial services

Nicolas Cailly
Deputy Director - Products, Payments & Cash Management

While FinTechs on their own lack some of the requirements to successfully launch products into the banking market, the BigTech companies, such as Google, Apple and Facebook, do not. These companies can bring significant value add, are well-known and credible among customers and have sufficient funding to create robust solutions. In this regard BigTechs are a more credible threat to financial institutions, but have not yet moved very quickly in the financial market. As an example Apple has billions of dollars of cash reserves and could afford to invest more significantly in Apple Pay, which relative to Apple’s total customer numbers, hasn’t been that successful yet even in the US. It is not so surprising as traditional moves of Big Tech is to go global directly, with standardised solutions. This can’t work in the payments’ industry where significant local complexities need to be coped with.

BigTechs do not have the financial and regulatory expertise of banks, which today are processing the financial transactions of the BigTechs’ payments applications. As with FinTechs, it is likely that banks will partner with BigTechs and will distribute financial services via BigTechs’ platforms.

Christophe Yanclo
Innovations and Payments Manager

BigTechs won’t stay out of the financial services market forever, and will eventually put more resources behind their financial services products. While they won’t necessarily make money out of payments, they will seek revenues from data. Amazon’s credit card, which was launched in January 2017, allows cardholders to earn points on their Amazon purchases that can be redeemed for Amazon gift cards. The company is prepared to ‘give away’ a very large amount of money in cashbacks in return for the payments data they will get from the cards.

BigTechs are much better at valuing and gaining advantage from data than banks. Bank haven’t fully exploited data for several reasons, including regulatory constraints. The regulatory environment is becoming more stringent and banks must now gain explicit customer consent before any data is used. Banks also value their trusted status very highly and are reluctant to do anything that might affect their brand and status. Customers know their data is safe with banks and for some aspects of financial services, they prefer to use a financial institution. However, this may not always be the case. In the future, BigTechs may make inroads and provide day-to-day financial transaction services, but this will depend on the market. In emerging markets, there are many more pain points and providing a full range of financial services will be difficult. In developed markets, BigTechs will be competing with long-established relationships between banks and trusted institutions.

A possible scenario in the future is that BigTechs will develop platforms or hubs that provide a single interface for customers to a wide range of financial services. These services could be developed by the BigTech itself or could be provided by different banks, working in partnership with the BigTech. Predicting what customers perceive as value is difficult, as sentiments can quickly change. BigTechs are gaining more credibility with their customers but there is unlikely to be a wholesale shift from banks to BigTechs overnight. Banks need to move quickly, however, to counter the potential threat of BigTechs. One way to do this is to partner with them. Putting up barriers to keep competitors out is never a strategy for success, and if banks go down this route they risk becoming ‘dumb pipes’ for other entities that will benefit from the value add of financial services.

Most of the BigTech firms (apart from Apple) evolved in a world of open standards and services, which created an environment in which functionality from other parties could be added to their core services. Banks should learn from this and open their services and environments to various parties, which they can do via APIs. Banks can partner with BigTechs on scenarios where value can be shared, including products that can “enlarge the cake”, bringing more revenue to all parties. Such products are increasingly advanced, moving away from ‘pure banking’ towards integrated payments and value-added services. For example, Societe Generale is building a product that provides a full suite of services to customers buying a car, including not only the payment, but also insurance, car health checks and guarantees. By adding services that are not purely banking, we can address a customer’s complete lifestyle needs in one step.

BigTechs won’t stay out of the financial services market forever, and will eventually put more resources behind their financial services products. While they won’t necessarily make money out of payments, they will seek revenues from data.

Caroline Kanoute
Innovations and Payments Manager

The retail payments market is a much likelier target for BigTechs and FinTechs, as it is relatively straightforward. Wholesale payments are more complex, particularly if addressing the needs of large multinational corporations. Processing payment transactions for these firms requires an understanding of many local jurisdictions and the management of huge volumes. However, as new comers gain experience and knowledge in the retail payments world, they will be in a better position to offer new services to corporates.

Nicolas Cailly Deputy Director - Payments & Cash Management Products Societe Generale
Christophe Yanclo Innovations and Payments Manager GTPS at Societe Generale
Caroline Kanoute Innovations and Payments Manager GTPS at Societe Generale