Bill Murray, senior researcher and advisor at Leading Edge Forum, discusses how the digerati have grown to be competitors to banks and what to do about them.
The digerati are taking bites from the banking sector, offering payment services, loans and credit, cash and savings products towards the under-banked. Amazon is increasingly referred to as a 'tech banking' firm. Amazon Pay has evolved to include a digital wallet for customers and a payments network for both online and brick-and mortar merchants. With Amazon Go's “Just Walk Out” technology – It will grant access to the store and allows people to grab-and-go without needing to physically check out to pay for products.
Amazon Cash fits neatly into Amazon's strategy of appealing to underbanked and unbanked populations, allowing users to deposit to their
Amazon.com balance by showing a barcode when paying cash at checkout locations, to allow them to shop at stores without a bank card. A partnership with Coinstar kiosks will extend Amazon Cash's reach into rival stores. Amazon Lending offers its online sellers loans to pay for working capital at rates which are typically less than a credit card. Additionally, it services the consumer market with store, debit and charge cards. The Amazon Reload digital debit card has features that challenge charge cards. Amazon is offering Finance-as-a-Feature.
This rapidly growing phenomenon of “tech banking,” where eCommerce giants provide financial services, was created of three effects. First, the financial crisis, which had an adverse impact on trust in the banking system. Second, multiplication of mobile devices, which reduced the benefits of physical distribution that banks previously enjoyed. Third, the demographic shift to millennials, who are more open than the elderly to financial services from non-traditional financial services firms.
Established banks make small or negative margins on serving most smaller businesses, so they cherry-pick customers, creating an under-banked market. Now that sophisticated analytics is mainstream, lending and payment opportunities are moving to the firms that have the best data on customers. That used to be banks, but now it is eCommerce companies – digerati – like Amazon, Alibaba and PayPal, whose payment processing capabilities can underpin 'tech banking'. Their customer information is more relevant, granular and timely. They can see minute-by-minute metrics, cash flows, shipping profiles, product accuracy and client satisfaction. Best of all, clients who have credit lines with these firms spend more compared to those who don't, so even low-margin tech banking makes it worth while.
The Digerati are cleaning up
The digerati are eating in to the traditional banking market at a scale any fintech organization would die for. Net interest income constitutes the majority of revenues in the banking sector, and this is where Amazon stands out when compared with most of its tech counterparts. From launch in 2011 to June 2021, Amazon reported it issued $3B across 20,000 business in the US, Japan, and the UK. The bulk of growth in the last year has been to businesses in america, where the company originated $1B in loans in 2021 alone. Amazon Loans has allowed SMEs to grow sales by approximately $4 billion. More than 20,000 small businesses have received a loan, and more than 1 / 2 of those have taken a second loan from the company. Loans range from $1,000 to $750,000 with interest rates between six and 14 percent. Amazon Payments, with 33 million users in 170 countries, is catching up to credit cards, and PayPal is already ahead of Apple Pay, Google Wallet and also the rest. Patents indicate that Amazon is considering the future of payments in terms of facial identity and selfies as a means of quickly paying. Payments is an efficiently served market, although not to a challenger with Amazon's superior amounts of efficiency, product integration and customer engagement.
But the Asian digerati are ahead of Amazon. Ant Financial, the finance arm of Alibaba (and formerly known as Alipay), is valued at around $60 billion. It provides payments, personal lending, banking products, savings products, and peer-to-peer lending.
Alibaba's four-year-old Yu'e Bao fund, a repository for leftover cash online spending, is the world's largest, with $165.6 billion under management. Ant Financial moved into fund management when it spotted the growing piles of cash in its customers' accounts that are used to pay for everything from coffee to taxis to fridges. By sweeping the money into a money market fund, Ant Financial is able to offer a return on surplus funds much better than the banks. Customers have responded by taking their money out of bank accounts and placing it within their Alipay digital wallets.
In theory, the next step for any of these organizations would be to acquire a banking license, and also the quickest way for them to do that would be to buy a traditional bank. Not just would they get the license, but they would be buying a customer base that may bring a significant credit card portfolio. Owning more of the card payment's value chain would provide them with an opportunity for cost reduction and even more data about customer behaviour – a vertical integration play in card payments. They would also get the capability to manage the deposit base they have already accumulated. However, it is less likely that Amazon is creating a bank than focussing on building financial services items that increase participation in the Amazon ecosystem.
Banks do not need to fear being different
Banks have significant advantages over would-be competitors. A bank is extremely regulated; it holds a grip on credit issuance and high risk; banks are by far the largest repository for deposits (which customers still mostly identify with their primary financial relationship); they are still the gateways to the world's largest payment systems; and they still attract the bulk of requests for credit.
The tech bankers understand how to win in a digital world, but traditional banks using their legacy loan books, branch networks and systems can win, too. It's concerning how to utilize those assets alongside advanced digital capabilities to outmaneuver the tech bankers: product innovation, technology innovation, relationship change, incubate, partner, venture, acquire. These are all possibilities, but only by taking a measured approach to comprehend the value that exists within those assets already.
Banks along with other financial services firms are systemically vital that you society, which is one of the reasons they're regulated so highly. However, they miss meeting the financial services needs of the underbanked, which are whole sections of business and society. The 'tech bankers' are increasingly meeting those needs, albeit they are driving up participation in their own ecosystems. As banks turn to shore up profits by diversifying they will inevitably compete with the tech bankers, but they can't do that by copying them; they will have to out innovate them.
About the Author
Bill Murray is really a Senior Researcher and Advisor for Innovative Forum. His IT career spans over 30 years, with 16 years like a Founder and Partner of Differentis, providing strategic IT consulting services to a lot of industry sectors. Bill practical knowledge of developing Digital and business technology strategies, business cases and alter programmes involving technology disruptions for example consumerization, analytics and cloud-based services. Recently, Bill has been helping clients develop IoT enabled business propositions and services in Connected Health, Connected Insurance, FMCG and offer chains, and advising on IoT platforms.
Bill is really a chartered engineer by background and started his career with Arup in high energy impact analysis within the nuclear and automotive industries.