Google, Apple, Facebook, and Amazon have all explored the obvious use cases; where they go next may dramatically alter the global market.
The large technology firms (Google, Apple, Facebook, Amazon) have entered financial services using the naturally aligned product spaces (i.e. mostly payments) and are now seeking further growth opportunities.
They will leverage their global customer bases to quickly gain product scale but regulation may still pose a barrier to entry. Some are also diverging into provision of infrastructure and enablement, such as cloud platforms and data toolsets.
Innovation is largely focussed on distribution, engagement, and experience rather than the underlying financial product. Their strong ownership of the customer relationship all but guarantees success.
Each of the large technology firms has, or is developing, a number of products that serve a customer’s financial needs.
|Company||Products & Services|
|Google Pay, e-money licence, cloud|
|Apple||Apple Pay, Apple Cash, Apple Card, P2P messaging payments|
|Calibra digital wallet, P2P messaging payments, infrastructure|
|Amazon||Branded cards/PCA, SME lending, Amazon Pay, insurance, cloud|
Payments was the natural entry-point for each given their proximity to the point of sale (both physical and digital) or the scale of their messaging network. Each has since expanded to other products and it’s clear this will continue; they are well capitalised and are looking to diversify their revenue streams.
Financial services offers two key revenue growth opportunities:
- Increase product retention and stickiness on the B2C side, and
- Increase usage of cloud and data technologies on the B2B side.
GAFA diverges across enabling services and direct to consumer. Amazon and Google both have industry-agnostic enablement services, namely AWS and GCP. All of the four provide unique consumer channels, intermediating and enabling customer-to-organisation communication. Amazon has integrated financing options into the Amazon Marketplace suite to directly support SMEs and grow their supplier ecosystem.
Each of the large technology firms have a direct-to-consumer offering, primarily focused on payments and, more recently, lending options.
Increasingly financial institutions may find they are partnering with or buying from GAFA in one dimension and directly competing in another.
The key challenges as they continue to enter the space are the further regulatory requirements and balance sheet constraints; I expect that they continue to white-label infrastructure but own the customer relationship.
Their scale (each has over 1bn customers) also indicates a preference for prime or near-prime segments and mass-market offerings but with a view to increasing customers’ access to better financial products and services.
Innovation by GAFA to date has not reinvented any of the underlying financial products. Attempts to do so, e.g. Facebook’s cryptocurrency, have not received regulatory approval and in fact have received widespread regulatory pushback.
Google and Amazon will continue to develop their sector vertical propositions and provide enabling capabilities and infrastructure across financial services.
Their market position is well established and shows little sign of changing in the short to medium term. All have recognised brands, captive user bases, world-leading technology, and large capital reserves.
Those closest to the retail experience will continue to pursue PoS credit offerings. Those who act as a central point of all customer activity may begin aggregating products and services, acting as a primary introducer. These will vary by market and depend largely on the willingness of customers to continue trusting them as they diversify.
Predicted Market Impact
In some cases, I expect revenue sharing deals where the use case is relatively new or the product heavily requires a partnership. Existing examples include the Apple-Goldman Sachs credit card.
Existing financial institutions will find they are now competing directly against a hyper scale business model; GAFA all have an appetite for low margins at high volumes. They will also experience a largely dis-intermediated customer relationship.
On the flip side, existing financial institutions will now have access to large, captive distribution channels where aggregator or white-label specific products will see strong product-market fit.
Any partnerships between GAFA and financial institutions will require a high level of product customisation and flexibility, in order to offer a redefined customer experience. Critical to this will be integration-friendly technology infrastructure and a high degree of automation for aggregator-led platforms.
Potential Responses for Financial Institutions
Core financial product innovation is so far untouched by GAFA; this leaves a whitespace for reinvention or disruption of traditional financial products.
- GAFA don’t (yet) have the expertise or regulatory permissions to design and launch non-traditional products.
- Existing regulatory permissions offer a strong competitive advantage if they are used to build new products that better serve customer needs.
GAFA and their competitors (e.g. Microsoft, Samsung) will continue to seek partnerships and extend their use of white-labelled solutions, offering an opportunity for B2B propositions from existing financial institutions.
- White-labelled solutions allow for a simple infrastructure-as-a-service revenue model; included in this could be both balance sheet access and usage of regulatory permissions.
- Being a first mover for partnerships will offer significant early advantage and large distribution channels – for some firms the complex technology requirements and scale may limit their ability to participate.
Enablement solutions developed by GAFA should be used to transform operating models and financial services products.
- Best-in-class technologies, such as cloud infrastructure and machine learning, are provided by both Google and Amazon for other businesses. As they focus more on providing vertical financial services propositions, these will allow firms to transform their operating model and eventually their business model.
Aggregator propositions – expected to be created by Google – also offer early mover advantage for those who first join but this will quickly erode once other firms do the same.
- Google has previously built and shutdown search comparison tools for insurance, credit cards, and mortgages in the US. These were built without the added benefit of Open Banking APIs and at a lower cost-per-click than the advertising model for those product typical searches.
The months and years ahead will pose interesting challenges for incumbent financial institutions and potentially offer GAFA large and lucrative revenue streams, if they can get the experience right. It may be a David vs. Goliath situation, and in this instance I favour Goliath.