Author, Charlie Tizard, Researcher at Leathwaite. 

Benjamin Franklin once said that there were only two certainties in life; death and taxes. He was wrong, or rather, he is now wrong. Disruptors in the banking landscape are as certain as kicking the bucket and contributing to HMRC. We are in the midst of financial revolution, witnessing challenger banks and fintech organisations attempting to reshape the industry by carving out their own niches, taking a small slice of the incumbents’ market share with targeted, ‘consumer first’ propositions. Whilst this is undoubtedly forcing the big five retail banks to look up and adapt, they are yet to see a mass exodus of customers and KPMG’s report The Game Changers shows their average growth continues. The Economist Intelligence Unit reported that 36% of banks think that tech companies will be their biggest competition by 2020, ahead of new banks and payments firms, but will an Amazon or Google really change the banking landscape and consign traditional retail banks to the shadows?

Where have the tech firms got to so far?

The four tech giants are involved in financial services, in particular the payments space. Current offerings include Apple Pay, Amazon Payments and Google Wallet; and Facebook unveiled its new payments messaging feature in the US. These products have different end goals. For example, Apple is creating a direct revenue source. It has exclusive deals with many of the major retail banks to manage the security of the Apple Pay system, and in turn takes a significant percentage of the transaction fees. Facebook on the other hand has insisted it is not looking to build a payments business; rather the goal is to foster and retain user engagement with its platform and thereby see advertising revenues grow – though tech opinions suggest such a model is not sustainable.

So why would they pose a threat?

Whilst payments companies such as PayPal will be rightly concerned, this is a far cry from entering the banks’ core proposition of accepting deposits and lending money. So, other than their considerable financial muscle, why would these tech giants be such a frightening proposition?

Put simply – it’s easier, cheaper and quicker to build new. Consumers today expect to be able to bank from personal devices at the touch of the button, confronted with a user experience akin to their smartphones, non-onerous security and instant transactions. Digital transformation is slow and costly for monolithic banks who have to adapt ancient, cumbersome, legacy systems and processes. Tech companies do not face the same issues; they can build a tailor made platform allowing them to glide through the banking landscape with continuous, fast paced innovation.  

Tech giants have vast customer bases that regularly interact with their products and brands. Facebook has over one billion users worldwide on whom it has unique data and insight and therefore are well placed to harness this information to effectively build, target and cross-sell products to consumers.

Whilst not claiming they are liked and trusted by all, especially in the light of negative press around their tax arrangements and an increased wariness towards how they use private data, the tech giants are otherwise blessed with recognised brand reputations, which is needed in today’s retail banking market.

What are the drawbacks?

Tech firms have a taste for financial services and possess the credentials to pose a real threat but there are downsides and risks when attempting to dethrone such entrenched organisations.  

Banks operate in a heavily regulated environment, the outlook for which is erring towards greater regulation. For the banks, this will lead to augmented costs, severer consequences for failure (Independent Accountability makes it a criminal offence) and less flexibility to operate. This is contrary to the market conditions in which tech companies usually look to set up shop. The Economist’s article Toy Story discusses the tech companies’ strategy of exploiting hitherto unregulated environments and hoping judges and lawmakers will accommodate them once the landscape has changed. Uber, for example, changed the taxi landscape and is now using its momentum to fight off regulation such as the proposed minimum five minute wait time in London and having to classify its drivers as employees rather than contractors. To move into an industry where regulation is established, costly and difficult to influence, would not fit its current model.

These tech giants are more profitable, with products that are easily scaled globally and create significant cash flow. Apple, for example, releases its latest iPhone almost simultaneously across the globe, selling large quantities at an instant profit. Why enter retail banking where profits would be squeezed and growth and scale hindered?

Digital banking is increasingly important, but as we saw in my previous article on the future of bank branches, branches remain a key interaction point for customers. This would not be a problem for Apple which has nearly 40 easily adaptable stores across the UK, however the other tech firms would either have to limit themselves to being digital-only banks or invest heavily in branch networks.

So, what might be next?

To be clear, I do not think we will seeing FaceBank or an Apple Bank branch anytime soon. Fundamentally buying an iPhone, organising an event via Facebook and watching the latest episode of Top Gear on Amazon Prime are somewhat removed from trusting a company with your life savings.

The big five retail banks are the established leaders and part of the financial furniture, and when it comes to important decisions, loyal banking customers often revert to what they know. The tech giants will avoid the high cost of regulation and continue to innovate from the lesser regulated side-lines and partnerships with established banks will become more commonplace. Alongside payments, tech firms are likely to actively collaborate on digital innovation projects, utilising customer data and comparison sites amongst others.

From a talent perspective, the flow between banks, payments firms and tech companies will continue to rise. Those who understand the products and customers will be progressively more valuable, alongside digital and tech talent which is already in high demand. Much of the Apple Pay team came from PayPal and Visa.

Collaborations with tech giants will help the incumbent banks improve how they interact with their customers and leave them more able to retain market share in an ever changing financial services landscape.