The global banking industry is a trillion-dollar industry and technology giants Google and Facebook are making a slow but sure banking and money transfer play. Over the last decade, fintech innovation has disrupted banking and financial services globally to a certain extent. And the rate at which things are changing in the banking industry is only expected to accelerate in the future. Technology is bound to take over traditional banking practices and usher in significant changes in the industry.
Many neobanks or challenger banks have popped up in several economies around the globe. However, these fintech startups or challenger banks are comparatively small in size, with limited funding and resources to cause major disruption in the global banking sector. Moreover the focus of neobanks have been on underserved markets left out of the banking system by mainstream banks. The entry of technology behemoths such as Google and Facebook could change the very face of the banking system. So why are these big techs jumping into the banking space? Is it the trillion-dollar banking sector and financial services margins that are attracting them? Not really. The main reason Google and Facebook are entering the banking and money transfer is for data. They already have volumes of data on users personally, but not on what users spend, when they spend it, and general consumer behavior. Of course, these companies sell advertising, and they can be more successful if they can see whether their advertising is working, and whether users are purchasing products which their targeted ads are pushing at them. In short, they want consumer’s financial data to improve their existing offerings.
Google steps into banking with Cache
When the Wall Street Journal first reported that Google is stepping into the banking scene, it shocked many. The announcement was a source of major speculations as Google is battling various legal cases related to data privacy in the courts of law.
The project, called Cache, will see Google take on banks in the consumer finance segment. Its services will be available in the US next year, however, it is unknown if Google will extend its services across all continents anytime soon. Google will offer the current account services in partnership with CitiGroup – the third largest bank in the US and a credit union based at Stanford University. Google’s Cache, is projected as an extension of Google’s ewallet digital payment system called Google Pay.
So the big question in everyone’s mind is, will Google’ Cache bring in a change to the global financial services landscape? With regard to this, Bjorn Cumps, Professor of Digital Banking at Vlerick Business School told International Finance that, “I think the launch of this will make the traditional banks wakeup, and become more digitally savvy at a faster pace. Financial services firms see the need to digitally transformed, and companies like Google entering the market encourage the industry to become more digital, more quickly. Not only this, but I think it is likely to accelerate the decrease in physical branches, which we have already begun to see. The role of financial companies and their employees will change, with traditional employment likely to go down, and new skills needed for employees, and even new jobs being created. Financial companies may also look to enter more markets, not just focusing on banking, but also insurance and market strategy too.
From a consumer perspective, I think the financial services landscape is likely to become a lot more confusing, with so many more services and products available. There will be increased ways for consumers to purchase products, and various payment systems, which of course will have an impact on consumers.”
Even though Google has not disclosed much about the new services as of yet, we may see collaborations between traditional banks and tech companies as a result of it, and banks might be forced to massively invest in AI. Therefore, thanks to AI, and big data, financial solutions would probably better suit the customer by being able to anticipate each individual’s future financial need. The only thing unkown is the cost of the individuals ability to control his or her data.
More banks to partner with Google in the future?
While there are many advantages for a commercial bank to form partnership with Google, we may see other banks getting onboard with Google to launch Cache in other countries. But since Google in new to the banking scene and Cache is a new product, only time will tell whether other banks will collaborate with Google.
But when Citi Group decided to partner with Google, other banks must be considering or at least carrying out a feasibility study. Collaborating with Google could provide a tremendous competitive advantage compared to other banks. However, on the other hand, the very DNA of banks is their commitment to customer privacy. The biggest risk for Citi Group beyond privacy is if Google’s real motivation is to acquire expertise, retaining new costumers, testing algorithms on financial data, and finally reaching enough market power to dictate the rules, squeezing partners’ profits, or even becoming ultimately a fully autonomous financial institution.
The decision will also come down to the bank’s strategy and their motto. If a bank is customer-centric and focused on the experience of customers, they may not decide to partner with Google, as they will then become a provider to them, and have little influence on customer-facing services. Firms that value providing this side of their service to customers are not likely to partner up with big tech.
However, some banks may decide to partner with Google given its popularity and customer reach. Another factor that a bank might consider is Google’s international presence. The majority of banks act on a national basis, and big tech firms could allow them to reach a much wider audience. Some banks may want to relinquish a bit of control in order to become more international. This could mean, them having control in their local markets, but offering international services, which would be controlled by big tech firms.
Facebook’s formidable attempt to change the financial system
While Google is partnering with traditional banks to venture into the banking space, Facebook announced its ambiguous plan to disrupt the global financial system by launching its own cryptocurrency. Called Libra, the social media giant announced that it will launch the services in June 2020 and users will be able to use it through Facebook’s digital wallet Calibra. The cryptocurrency app will allow Facebook users to send, receive or withdraw money by just tapping on their devices’ screen. The users will also be able to pay bills, share tabs in restaurants, buy a cup of coffee and ride the local public transit without the need to carry cash.
Libra, which is a type of stablecoin, is backed by traditional money and other securities. While Libra too is a cryptocurrency like bitcoin, the latter is not backed by traditional money and is more volatile in nature. Facebook launched Libra in collaboration with 27 other companies and says the digital currency would be overseen by a Switzerland-based independent nonprofit organistation called the Libra Association.
However, Facebook’s announcement of Libra was met with skepticism and lambasted by global leaders and regulators. While Facebook claims it is building a better payment network, broadening access to essential financial services, and lowering costs for billions of people, many central bankers, lawmakers, and top data protection officials from the US and Europe voiced their concerns about the usage of personal as well as financial data by Facebook, and about the regulatory challenges of Libra. Many even fear that the launch of Libra could dampen the global fight against money laundering, terrorism financing, and global financial stability.
After being bombarded by constant criticism, a quarter of Libra’s original backers including payments giants such as Mastercard and Visa have abandoned the programme. As things stand, only time will tell whether Facebook’s Libra has future or is set to be one of those big projects which were meant to change the world but never actually took off.
When we asked Samuel Ouzan, assistant professor of Finance at NEOMA Business School the same question, he told International Finance, “I don’t think so. Particularly because of the increasing public mistrust of the Facebook platform, and the massive governments’ opposition we observe all around the world, following Libra announcement. The success of Facebook’s cryptocurrency would depend on how decentralized Libra really is. Facebook data dominance is a real concern. Therefore, in the short term, I have a hard time to imagine Facebook planning to propose checking accounts to its customers.”
Bjorn Cumps, however, thinks otherwise. He told International Finance, “Yes, I do think there is a future for Facebook’s Libra. I, in fact, saw them present in Brussels just last week, and I think that the way they are navigating the industry means that they do have a future. They are actively working with regulators in the industry, to ensure that Libra is legitimate, something very different from innovative Fintech companies we’ve seen enter the market recently, who’ve boasted about ‘smashing the industry’ and ‘not caring about the banking rules’.”
Facebook Libra is actively working with regulators, answering the questions that they have over the currency, and ensuring that it meets their expectations. They are changing their model because of this, actively adapting and coming up with new solutions to fit in with the legalities of the industry – this is why I think that there will certainly be a future for the currency.”
But Libra’s troubles are multiplying and those who reject Libra in its current form are powerful people. The president of Switzerland where the cryptocurrency is seeking regulatory consent said in late December that Facebook’s Libra project has failed in its current form and needs reworking to be approved. “I don’t think (Libra has a chance in its current form), because central banks will not accept the basket of currencies underpinning it,” Ueli Maurer, who is Switzerland’s finance minister and outgoing president, was reported as telling Swiss broadcaster SRF. In October, French Economy Minister Bruno Le Maire sharply criticised Libra, saying, “Libra is not welcome on European soil.” “We will take steps with the Italians and Germans, because our sovereignty is at stake.” In November, a US Federal Reserve oicial expressed American reservations. “Without requisite safeguards, stablecoin networks at global scale may put consumers at risk,” Fed Governor Lael Brainard said in a speech in Frankfurt. Among those who have criticised Facebook’s unrestrained expansion into all aspects of users Iives through Libra is the chair of the powerful US House Financial Services Committee Maxine Waters.
What is the impact of big tech’s entry into the banking system
Besides announcing the controversial cryptocurrency Libra, Facebook has launched its payment platform Facebook Pay in the US. According to Facebook, the service will be available in Messenger at first; however, it will soon be rolled out to other social media platforms owned by Facebook such as WhatsApp and Instagram.
So what impact will the entry of these tech giants into the banking system have? Firstly, there will be a huge amount of activity increase on behalf of regulatory bodies, who will be working overtime in ensuring that Facebook and Google’s practices are legal and correct. Also, companies currently in the market will act either one of two ways; clubbing together to challenge and compete against Google and Facebook, or actively working with them to provide solutions. Clubbing together to fight Facebook and Google could be fighting a losing battle due to companies like Google and Facebook’s international reach and funding.
Bjorn Cumps told International Finance that, “I foresee big tech companies entering the market impacting current banking services to rapidly increase their digital transformation. Firms will need to be as digitally savvy as possible to compete, and the introduction of tech companies in the market will force traditional banks to change and adapt at a quicker pace.”
What will be the impact on fintechs and challenger banks?
Bjorn Cumps too believes that the niche players such as fintechs and neobanks should be worried. According to him, Cache is offering financial management services to a number of consumers, something banks had not traditionally offered, and fintech startups often plugged the gap for. Financial advice, purchasing tools and so on, was something we were likely to see offered digitally by traditional banks in one to two years’ time, but this is likely to accelerate with big tech firms also beginning to offer these services. Of course, companies like Google have an international reach in offering these services, whereas banks do not – that makes big tech firms more of a threat in this area to fintech startups.
When we asked the question to Samuel Ouzan, he too agreed that fintech startups must think proactively and prepare for battle with the big techs. He told International Finance that the tech giant hasn’t disclosed yet what would be the new analytical tools and smart features of Cache’s checking accounts. He believes, given Google’s position in the Artificial Intelligence landscape, it may provide its consumers with smart budgeting tools and new features that will strongly disrupt user experience in personal finance.
Should Google and Facebook venture into banking after all?
In the last couple of years, both Google and Facebook have been part of major controversies. Despite its popularity, Google has been taken to court numerous times with matters related to privacy, advertising, patent, as well as gender discrimination. Recently, it was alleged that Google tracked the personal data of four million iPhone users. The Federal Trade Commission (FTC) found Google liable for misrepresenting ‘privacy assurances to users of Apple’s Safari Internet browser’. Even way back in 2010, Google was accused of breaching several electronic communications laws with the launch of its new product Google Buzz.
The Facebook–Cambridge Analytica data led to Facebook losing more than $100 billion in market capitalisation. So how willing will be consumers to share their personal as well as financial data with these big tech companies? Bjorn Chumps believes this really is something that should be left up to the consumer to decide.
He told International Finance, “Some consumers may object to handing over so much of their financial data, including what they purchase, how much money they spend and so on. Of course, this may be due to these big tech companies already having amassed a huge amount of other personal data on us, which coupled which our financial data could make these companies much more powerful. This is something we need to reflect on as consumers when deciding which company to give our data to.”
Underpinning all concerns is the ethical dimension of Facebook and Google, companies controlled by a select group of individuals who are already powerful enough to challenge democratically elected governments, controlling even more granular user data and, more importantly, how people perceive reality. The power this will give to these individuals over ordinary human beings is frightening.
Samuel Ouzan told International Finance that, “I am not sure if it is judicious for our societies as well as for big tech companies, who already have more power than many countries, to have access, for example, to account balances of individuals and businesses. Any scandal involving this kind of financial data might have an irreversible impact on public trust. “
He added, “I expect new political forces will emerge very soon against this kind of control. The rise of totalitarian technology controlled by very few individuals represents an unprecedented threat for democracy. Cognitive science provides plenty of evidence that people tend to react very strongly when behavioral freedoms are at risk. Altering or controlling how people all over the world perceive reality is certainly unconsciously by far one of the biggest threats to our freedom.”