25 février 2019

Technical tussle: FinTech v BigTech

Are FinTech companies set to be eclipsed by the arrival of BigTech?

FinTech companies have already disrupted the financial services market in a sizeable way. Smartphone-based FinTech applications have widened market access, lowered costs and increased the diversity of products available to consumers. But thus far, the large incumbent players in the market (banks and long-established finance houses) have been able to keep pace with these changes, either by partnering with start-up FinTech companies, or by utilising access to cheap credit to fund disruptive products of their own.

But in their quest for survival, are big financials training their guns on the wrong targets? A recent paper published by the Financial Stability Board (FSB) suggests this may well be the case.

Changing times: FinTechs making waves

The FSB is an international body that monitors the global financial system. Earlier this month, it published a paper titled, "FinTech and market structure in financial services: market developments and potential financial stability implications". The publication of the paper comes at a critical juncture in the financial services market, with disruptive technologies from cryptos to robo-advisors threatening to change the infrastructure of the market beyond recognition, taking with them, a sizeable chunk of business from established banks and financial firms.

For a long time, banks took advantage of the fact that a conventional bank account actually bundled together a wide range of different services. This allowed banks to operate in a largely sheltered oligopoly, behind market-entry barriers that prevented competition in several parts of their core service offering. However, with the advent of Open Banking and the concomitant requirement to unbundle many of these services, FinTech companies have leapt at the chance to capture and compete for this business and its customers.

One area that has seen significant inroads by FinTech companies is payments. FinTech companies in this space have been able to offer efficiencies, cost savings and value-adds to consumers that were hitherto unavailable from outdated bank systems. The increasing use of application programme interfaces (APIs) means that the smartphone is becoming the most common place for a consumer to interact with their financial services provider. In addition, the user-friendly feel of many FinTech apps and the 'gamification' of their interfaces means that it's no surprise that they are hoovering up business from millennials, who are increasingly sceptical of traditional financial institutions.

In some cases, banks have protected themselves by partnering up with FinTech companies that offer complimentary services, or have taken advantage of entrenched economies of scale to invest in their own innovative technology. Nonetheless, as the FSB paper points out, these defensive moves could amount to little more than small beer when considering who the banks might be facing-up to in their next battle.

BigTech, big threat

BigTech firms like Amazon, Facebook and Google, are now the biggest companies in the world. They typically enjoy established customer networks unrivalled in size and benefit from worldwide brand recognition.

Not only does their respective size allow them to access cheap credit in the same manner that banks do, but they also possess the greatest amount of the 21st century's most valuable commodity: personal data. All this allows them to court innovation whilst achieving scale with breathtaking speed. As the FSB paper notes, a 'striking example' of this is borne out in the Chinese payments sector, where two BigTech companies (Alibaba and Tencent) account for 94% of the overall market.

But China is not the only ground trampled by the big strides of BigTech: Amazon's seller lending business has a value of $2.6 billion; PayPal Capital is increasing its lending business in Australia, Japan and the UK; and Vodafone Mpesa has 32 million active payments users in East Africa, Egypt and India. The scale of this impact dwarfs anything that has been achieved by even the most successful of Fintech start-ups.

And this is no surprise. BigTech firms are well-versed in bringing innovative technology to the market, and their unrivalled access into many of our private lives and habits allows them to understand what works and what doesn’t with ruthless efficiency. Many users of BigTech financial products are simply using services that overlay platforms they already use to communicate with friends and family on a daily basis. A captive audience of consumers is a dreamlike head-start for any business.

Future landscapes

The FSB paper highlights that BigTech threatens to remodel the infrastructure of financial services far more than FinTechs. What this means for banks however is presently unclear. Whilst it is easy to see how a payment service could be an overlay to an application such as WhatsApp or Facebook Messenger, the same cannot be said for other 'unbundled' services. For example, how would a BigTech company integrate deposit-taking or financial advice into its existing platforms? Therefore, will banks look to take greater risks in recapturing lost unbundled services, or refocus their efforts on those parts of the business that lend themselves more to their existing infrastructure? Whatever the answer, in future, the financial services landscape is unlikely to remain the same.

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