PAUL CHAVES D’OLIVEIRA
Google, Apple, Facebook, and Amazon are all entering the fintech business. They are doing it for various reasons and through different means, but they all share the same advantage of superior technology relative to that of traditional banks: data, and the technology to analyse it, namely AI. Their move is already worrying bankers who are facing a new kind of competition but will prove a major disruption if their entry into fintech becomes more complete. The blurred lines between tech, fintech, and banking will embody a new wave of financial innovation, which should be welcomed as it will make the sector more efficient in various ways but should also be regulated because of the financial instability it might create.
The reasons why these tech giants want to enter this industry are different for each of them, but a few common motivations exist. As for all mammoths entering a new sector, one of the reasons to do so is diversification. The revenue streams coming from finance would make overall cash flows less dependent on the firms’ main activity. While it has been shown that this is rarely in the interest of shareholders, who can diversify their portfolios themselves more efficiently, conglomerates have always championed diversification and GAFAs are no exception. A more important motivation they share is access to users’ financial data which, coupled with the data they already have, can prove to be a gold mine. The commonalities extend to their fintech strategies: all four began by proposing payments services before expanding their fintech activities each in their own way.
Google has a particularly strong incentive to access people’s financial data. A large part of its revenue comes from advertisements placed in the results of users’ search queries. The more data Google has about you, the more pertinent those ads will be, and the more Google can charge the companies advertised. Financial data will enrich what Google already has to create ads even better targeted. For example, whether you actually buy the advertised products is incredibly valuable information that would allow Google to charge advertisers much more if you do. More generally, financial data would help craft a more personalised user experience on all of its services by adding to the already rich set of information Google has about its users. Google’s heavy investments in Artificial Intelligence over the past years should prove an asset in analysing these data.
These ambitions are embodied by Google Pay, born of the fusion of Android Pay and Google Wallet. It is a digital wallet platform which allows its users to pay for things through their phones, tablets, laptops, or other devices, including in-store, online, and peer-to-peer transactions. Expansions from the simple payments app included an update on the app that let users check up on their bank and credit card accounts and allowed Google to present personalised offers from merchants. Furthermore, with the next update, users will be able to open and manage bank accounts directly from the app. The account would be hosted at a partner bank, but the customer experience would be entirely Google’s, somewhat relegating the bank to a back-end role. As for the precious transaction data, it will also stay within control of the bank but pending agreement from the user, can be shared with Google to serve up personalised offers.
Apple has different reasons to enter the banking industry than the other GAFAs, notably because its business model is so different. Its main revenue source is the sale of its hardware products, and its real bottom-line motivation is to sell more of them. It obviously proposes many other services but, as they are optimally designed for Apple products, the idea is for users to enjoy these services enough to award Apple brand fidelity. These services include fintech, as the use of convenient Apple-exclusive financial services will entice one to buy another iPhone once a change is due. Moreover, as for Google, there are clear synergies between financial and other services, as compatible data can be used to create more personal customer experiences.
To achieve those objectives, Apple launched Apple Pay in 2014, a payments app supported on Apple products, that allows users to pay both online and in-store at contactless terminals. With 441 million monthly active users, it is the most popular GAFA-issued payments service despite not being as integrative as Google’s solution. Apple has multiplied attempts at attracting more users to it, such as the Apple Card, a credit card created in partnership with Goldman Sachs. It was not designed as a revenue source, but rather as a way of pulling customers for Apple Pay, notably with its 2% cashback on digital payments using the service.
Facebook wants to capitalise on its massive userbase by integrating financial services in its networks. By doing so, it will enhance its ad-based revenues, by using financial data to make advertisements more accurate and therefore more profitable, but also by increasing the time spent on its networks, which increases the number of ads seen. Moreover, Facebook wants to compete with Amazon on the highly profitable and quickly growing e-commerce front.
Facebook’s payments system was creatively named Facebook Pay. It was originally designed for P2P payments using one of Facebook’s networks, but has since been expanded to allow users to make purchases and donations on either Facebook, Instagram, or WhatsApp. Unlike Apple’s or Google’s Pay apps, it cannot be used in store or outside of Facebook-owned networks. Facebook Pay has been developed in parallel to another fintech venture: Facebook Shops. After already allowing P2P sales of new and used items through its Marketplace, this allowed vendors to have virtual storefronts where users could look around and buy products with an integrated checkout. The appeal for buyers was not only avoiding having to go through an external website and its implicated inconvenience, but also the ability to chat with sellers on Facebook Messenger before making a purchase.
Facebook’s most well-known fintech foray remains the Diem, formerly known as the Libra. It is not a product they own but rather a Facebook-led project with backers from different areas of the fintech industry. The idea was to create a global cryptocurrency to possibly rival the dollar, aimed at the billions of people without a bank account who would be able to make online payments using an entry-level smartphone and data connectivity. As for all cryptocurrencies, there was no central authority but a blockchain-based system where each transaction was validated by the one before it. However, the flood of regulatory, antitrust, and overall political resentment it generated, notably due to the central role of Facebook, forced the then-Libra project to seriously scale down its ambitions. The new version of the project included not one single coin, but a series of cryptocurrencies designed to each reflect a national currency, as well as a digital composite of these coins for cross-border transactions and countries with no digital currency. While the heavy setbacks suffered by this project in its early life make it hard to predict its future, it still has potential to disrupt the online payments and cryptocurrency worlds and bring the millions of people without banking accounts into the digital economy.
Out of the four GAFAs, Amazon is probably the one with the biggest head-start in the finance industry. Its many financial endeavours show its motivation to make fintech a major component of their business model. They want to combine consumer data with financial data to create tailor-made financial products and personalised banking experiences and, eventually, become your primary bank. The ultimate goal is to make the digital economy more efficient, to bring more vendors and consumers into Amazon’s ecosystem, and to grow the activity on its platforms.
You guessed it, Amazon’s payments service is called Amazon Pay. However, Amazon’s first attempt at a payments system, which dates to 2007, was called Pay with Amazon, coupled with a P2P payments platform called TextPayMe – products of a bygone era of creativity in Big Tech naming. After multiple rebrandings and attempts to strengthen the service, Amazon Pay is somewhat different from your standard GAFA-issued payments service, being less personal finance-focused and instead targeting businesses. Like Facebook Pay, Amazon’s payments service is limited to online transactions, as they do not have the same foothold Google and Apple have when it comes to hardware products, which can then be integrated for offline transactions.
However, there is no shortage of Amazon personal finance products. From a JP Morgan Chase co-branded credit card to Amazon Cash, which allows customers to deposit physical cash to a digital account, without a fee. Amazon Cash allowed the company to appeal to people without banking accounts – it only requires a phone and a printer to open an account – to spend their digital cash on Amazon’s marketplace. In 2017, 8.4M US households, composed of 14.1M adults and 6.4M children, were unbanked. The market opportunity is even more significant in lesser-developed economies: only 37% of adults have a bank account in Mexico, and 190M Indian citizens are unbanked. The race to these markets is and will be crucial to the strategy of all fintech players.
Amazon also brought kid-friendly alternatives under Cash’s umbrella, like Amazon Allowance, a now-discontinued parental-controlled-and-overseen digital checking account, or Greenlight, a physical debit card for which parents can manage spending and allocate funds. Amazon PayCode, Reload, various Store cards, are all examples of how Amazon wants to help you digitalise your finances and make purchases on their website.
The real targets of Amazon’s fintech services, however, are businesses. Amazon Business is a B2B marketplace where businesses can also get credit either directly from Amazon or from third-party lenders through Amazon, depending on the country. There are other advantages to members of Business that help reduce costs for merchants and basically make both the B2B and B2C marketplaces more competitive. With Amazon Lending, they make loans to SMBs who could not qualify for loans or credit lines from traditional banks. Through partnerships with Goldman Sachs, Bank of America Merryll Lynch, and ING in Germany, Lending has issued over $5bn in loans since its launch in 2012. The partnerships allow Amazon to differentiate itself by using their superior technology to issue cheaper loans while sharing the risk. This sort of GAFA-traditional bank partnership is clearly a disruptive movement in the US financial industry, but like other fintech innovations, has been in vogue for longer on the other side of the Pacific.
The Chinese Model
The USA’s GAFA are matched if not in Occidentally widespread clout then in growth and oligopoly by China’s BAT – aka Baidu, Ant, and Tencent. The ventures and successes of the two latter are examples that have or should have inspired GAFAs in their fintech ambitions, and that they provide a solid basis for speculation as to future GAFA financial endeavours.
Tencent, parent company of the wider-known WeChat, originally a simple messenger app with now a whopping 1.2 billion users, has since its launch in 1999 transformed the not-so-lucrative messenger into one of the first fintech giants. The first step was integrating a payments services into WeChat, initially intended for small and social payments but now also used for all kinds of off- and online payments. WeChat Pay is used monthly by 800 million of the total 1.2 billion and now offers most if not all the services you would expect from a traditional bank: wealth management, credit (consumer and business loans), and insurance.
Ant Group was first a private spin-off of Alibaba’s financial division, particularly its payments services, which was launched in 2004. Alibaba itself is a tech giant with activities ranging from e-commerce to cloud computing to AI technology. Ant’s Alipay app has less users than WeChat Pay, 711 million monthly active users to be exact, but has larger revenues due to earlier and bigger entry into more complex financial ventures. It also benefited significantly from the Alipay monopoly on Alibaba’s popular e-commerce platforms. Ant is one of the world leaders in consumer and small business loans, as well as wealth management (in 2019, Ant’s $600 billion AUM dwarfed Tencent’s estimated $131 billion). The similarities are clear between Amazon and Ant/Alibaba, who share many common activities. Their e-commerce platform gave them the motivation and the tools to see the benefits in payments services early and aggressively pursue fintech strategies.
Both Ant and Tencent have heavily integrated all these fintech services into aptly named “super apps”, Alipay and WeChat respectively, which through convenience for users and data-usage synergy have allowed them to establish a dominant position on the fintech market in South-East Asia. Most fintech companies have followed the model of debundling and rebundling of financial services. The reasons all the companies mentioned here started with payments are the low barriers to entry and the convenience for users who were already familiar with these platforms. Their easy access has brought into the digital economy millions of unbanked Chinese people and their advanced tech has allowed them to make loans to those who could not qualify for traditional bank loans. Speculation on future GAFA fintech projects can be enriched by looking at these Chinese companies. Notably, even tighter integration of their various services and possible attempts at wealth management would not come as surprises to yours truly.
However, do not let me fool you into thinking that GAFA can fully replicate Ant and Tencent’s success. Importantly, the pre-BAT Chinese economy was largely cash-based, as most Chinese people did not have bank accounts or credit cards. This not only helped the transition into digital payments but also liberated Ant and Tencent from the consumer distrust of people with traditional bank accounts vis-à-vis tech companies managing their finances. This is a major problem faced by GAFA and one of the barriers to them more fully entering the fintech industry.
The Barriers For GAFA
Wariness of GAFA as financiers comes not just from their not being traditional banks, but also from their sheer size and dominance of the Internet economy, unlike less diversified Fintech players. Orwellian uneasiness and privacy concerns about even more involvement of the tech giants into people’s lives and wallets are evident in the relatively timid successes of their payment services. This has also manifested itself in the various anti-trust lawsuits faced by all four GAFAs, as governments wish to re-establish their sovereignty against the ever more dominant tech companies.
The bigger threat for GAFA is probably the regulatory one, however. No article worth its ink (even digital) would mention Ant without its famously cancelled IPO. While there is no doubt that Ant founder Jack Ma’s critiques of the heavily regulated banking system days before the planned IPO were not well received by the Chinese Communist Party, the government’s official line of ensuring financial stability is sensible. An example would be the percentage of loans made kept by Ant on its books. Regulators wanted Ant to have more skin in the game than it did, 30% up from 2% of loans kept on Ant’s books with the rest outsourced to third-party banks. Given the heavy necessary reliance of banks on Ant’s data and the rising default rates due to the pandemic, financial stability concerns were valid and prompted unprecedented new regulation days before the planned IPO. This significantly affected Ant’s business model and reduced its valuation. Crushed under the regulatory boot, Ant had no choice but to postpone its IPO. While it is hard to see such an extreme example happening somewhere other than China, Facebook’s Libra debacle showed that regulatory risks also exist for GAFA.
It is easy to understand why Big Tech’s massive and ever-growing databases raise anti-trust concerns, but regulatory risks related to the use of AI are more obscure yet just as critical. AI is essentially a new and disruptive way to analyse data, with huge upside potential but also stability risks. A Financial Stability Board paper noted that AI could lead to more interconnectedness between financial markets and institutions. An MIT paper presented the financial stability risks linked with deep learning, a subfield of AI. Systemic fragility through herding, network interconnectedness and regulatory gaps is one of the downsides the paper presents. It seems clear that adoption of AI in financial practices should not be banned or discouraged, but current regulation is not adapted to this often ill-understood technology.
The arrival of GAFA into finance is essentially blurring the lines between tech, fintech, and banking and has huge upside potential for the digital economy. As tech companies, they enjoy more relaxed regulation than banks do, but their growing role in finance creates the need for new regulation adapted to them.
- Google Pay: Checks and Balances: https://www.ft.com/content/08deaa21-d569-4cfb-9456-8d779b61643b
- Google revamps its strategy towards banking: https://www.ft.com/content/efa0a92f-b878-4c2e-a531-55b8501963a5
- EU sets sights on Apple Pay over antitrust concerns: https://www.ft.com/content/e65c9a76-f039-11e9-bfa4-b25f11f42901
- Apple Pay draws antitrust attention: https://www.ft.com/content/13da1d7e-d771-40b1-a597-e37ab7112d46
- Goldman’s Apple Card launch leaves questions unanswered: https://www.ft.com/content/2d7051f8-4f51-11e9-b401-8d9ef1626294
- What the Apple Card gets wrong, and right: https://www.ft.com/content/aad5be8a-bce8-11e9-b350-db00d509634e
- Apple/Goldman Sachs: Pay Pals: https://www.ft.com/content/30a9c2f0-bd5b-11e9-b350-db00d509634e
- Goldman/Amazon: Credit buddies: https://www.ft.com/content/9dc3e045-d04e-4738-9587-b91fb7f58aaf
- Goldman in talks with Amazon to offer small business loans: https://www.ft.com/content/41866efe-4521-11ea-aeb3-955839e06441
- Amazon expands business-to-business marketplace in the UK: https://www.ft.com/content/d928ee82-1886-11e7-a53d-df09f373be87
- Amazon seeks to revive its faltering loans business; https://www.ft.com/content/1eb61d50-81fb-11e9-b592-5fe435b57a3b
- When tech companies become more powerful than governments: https://www.ft.com/content/9b9cf00e-b81b-341b-a68a-efabfed00d45
- Facebook takes on Amazon with online shopping venture: https://www.ft.com/content/690ee286-99b6-4fa8-b02d-cfd50448a53d
- Facebook’s Libra currency to launch in limited format: https://www.ft.com/content/cfe4ca11-139a-4d4e-8a65-b3be3a0166be
- How Facebook’s Libra went from world changer to just another Libra: https://www.ft.com/content/79376464-72b5-41fa-8f14-9f308acaf83b
- ECB highlights risks of digital currencies like Facebook’s Libra: https://www.ft.com/content/518a94cf-91e2-4e9f-bca8-5f29693340e7
- Facebook integrates payments over its three networks: https://www.ft.com/content/abbcd08c-0576-11ea-a984-fbbacad9e7dd
- Gensler, Gary and Bailey, Lily, Deep Learning and Financial Stability (November 1, 2020). Available at SSRN: https://ssrn.com/abstract=3723132
- Five ways banks are responding to the fintech threat: https://www.ft.com/content/d0ab6b84-c183-11e8-84cd-9e601db069b8
- Fintechs take on banks at their own game: https://www.ft.com/content/0e8033e3-f633-4dc8-8a6a-f12f847eb399
- Lufax beats Ant to IPO: https://www.ft.com/content/919cf3b8-86f1-4844-9abb-6e0090d31d39
- China’s regulator signals touch fintech laws: https://www.ft.com/content/843b3f60-292b-431f-a94c-93c78bc72bae
- Ant IPO: the regulators strike back: https://www.ft.com/content/ff5cbd9f-dbc3-485d-a965-a4c39aa2e47f
- AI is reshaping finance: https://www.ft.com/content/c7d9a81c-e6a3-4f37-bbfd-71dcefda3739
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