The size and power of the major technology firms -- Amazon, Facebook, Google, Apple, Microsoft -- continues to grow. Their business models leverage the customer base built through data analytics, users’ increasing use of their services and a high degree of synergy within the company to cross-leverage this data.
An essential by-product of their businesses is the massive stock of user data generated. It’s then utilized to offer a range of services that exploit ancillary customer services, generating further user activity. Increased user activity then completes the circle, as it generates yet more data – and revenue.
This is an exponential model. In a short span of time Amazon has close to 310 million active customer accounts worldwide. Ninety million are Amazon Prime members, who spend an average of US$1,300 per year on the platform, with the remaining 220 million non-Prime members spending an average of $700 a year, which accounts for close to $300 billion in annual revenues. Having started with books, Amazon now competes in several established businesses beyond retail including Infrastructure cloud services, shipping and entertainment.
Building on the advantages of this data-network-activities loop, some have ventured into financial services, including payments, money management, insurance and lending. Today financial services are only a small part of their global business but it has the potential to spark rapid change in the industry. Per McKinsey & Co, tech giants are set to grab up to 40% of the $1.35 trillion in US financial services revenue from incumbent banks. Most are already encroaching on financial services -- with Apple Pay, Facebook Pay, Google Pay, Amazon Pay -- and threatening incumbents with their size and ability to attract massive, loyal user bases.
Redefining customer experience
The tech companies offer many potential benefits. Its low-cost business structure easily scales to provide basic financial services, especially in places where large parts of the population remain unbanked. Apple teamed with Goldman Sachs to launch Apple Pay in 2014 and in just five years they accounted for 10% of all card transactions.
Using big data and analysis of the network in their established platforms, they can assess borrowers’ risk, reducing the need for collateral to assure repayment. Google plans to introduce consumer bank accounts later this year in collaboration with Citibank and a California-based credit union. As such, the big tech players stand to enhance the efficiency of financial services, increasing financial inclusion and potentially allowing associated gains in economic activity.
These tech players are redefining customer experience across all sectors, including financial services. They leverage emerging technologies, volumes of customer data, and actionable insights to both understand and predict behaviors and needs. Unlike emerging financial technology firms, these tech firms have both massive customer bases and vast cash reserves with which to scale operations. Given their global reach, they also have a strong impact in emerging markets where adoption is much faster than established markets. Asian and South American markets have a huge untapped population of cash only users – but who are on mobile devices - who are prime for digital wallets.
Payments were the first financial service big techs offered, mainly to help overcome the lack of trust between buyers and sellers on e-commerce platforms – both buyers and sellers want secure and assured payments. Payment services like PayPal (now owned by eBay) allow guaranteed settlement at delivery and/or reclaims by buyers and are fully integrated into e- commerce platforms. But over time, big techs' payment services have become more widely used as an alternative to other electronic payment means such as credit and debit cards.
The tech companies’ payment platforms are currently of two distinct types.
The first type is the ‘overlay’ system, where users rely on existing third-party infrastructures such as credit card or retail payment systems, to process and settle payments (e.g. Apple Pay, Google Pay, PayPal).
In the second type, users can make payments which are processed and settled on a system proprietary to the tech company such as Alipay. This has yet to become popular in the west until the acceptance of digital currency. Facebook announced in 2019 plans to issue a digital coin called Libra, and has formed a partnership with 27 other “founding members” to govern it. The Libra project essentially puts Facebook and its partners into competition with the Federal Reserve but the service has yet to be launched.
The major tech players are also using their wide customer network and brand name recognition to offer money market funds and insurance products on their platforms. This business line capitalizes on their payment services, creating a one-stop shop aiming to be more accessible, faster and more user-friendly than those offered by banks and other financial institutions.
Some have ventured into lending, mainly to SMEs and consumers. Loans offered are typically credit lines or small loans with short maturity (up to one year). The relative size of credit varies greatly across countries.
Leveraging technology plays a key role in competing in the financial services market and obviously where the major tech players have a huge advantage.
From a user experience perspective, they excel at the ‘nudge philosophy’ -- that dopamine hit we get with every ping of a notification or alert, aimed at increasing the time customers spend on their platforms and apps. They have the user experience of mass personalization down to a tee, getting far more daily engagement with their billions of users, app stores, digital wallets and mobile phones than any of the banks could ever hope to achieve. Taking advantage of optimum software development frameworks, API-driven and using DevOps for continuous integration, they can react to market and customer needs in almost real time.
The tech players are having great success in emerging markets like China and India with huge populations. The exponential increase of mobile phones has led to the rapid adoption of the newer digital technologies.
In India, Amazon offers Amazon Pay credit card with ICICI Bank. Facebook, which looks at India as one the fastest growing markets (in terms of usage of FB, WhatsApp etc.), announced Calibra, a new digital wallet, built exclusively for Libra that will be available in WhatsApp, Messenger, and as a standalone app. Facebook Pay, launched in November 2019, is also available across Facebook apps — Instagram, WhatsApp and Messenger. Google unified its digital payments offerings under Google Pay allowing users to pay on desktops, phones and Apple devices. Google Pay has seen widespread acceptance in India, emerging as the number one non-banking option with over 6.7 crore monthly users.
Data analytics, network externalities and interwoven activities constitute the key features of big techs' business models. These three elements reinforce each other. Big techs' DNA can lower the barriers to provide financial services by reducing information and transaction costs, and thereby enhance financial inclusion. Their expertise around user experience also makes apps attractive and easy to use – a frictionless experience. But these gains vary by financial service and come with new risks and market failures.
While the major tech players are threatening to take on established financial institutions, we are still far away from having a robust risk and compliance framework in this changing landscape.
Sandeepan Mukherjee is business and strategy principal, Growth and Solutions, BFSI, at Persistent Systems.