January 12, 2018 9:40 AM / American Banker
There's been a lot of noise over the past year around whether fintech
firms — or, more seriously, Silicon Valley behemoths like Amazon and Google —
are going to make a run at owning a bank.
The Office of the Comptroller of the Currency moved ahead on its plan to
offer a charter for nonbank fintech firms, and then-acting Comptroller Keith
Noreika suggested that any firm could theoretically apply, a break from his
predecessor. Amazon and PayPal executives even had meetings with the OCC over
the past year, though whether they discussed the charter was unclear.
Lost in all this was an inescapable fact: Big tech firms like Amazon
don't need a charter to disrupt the banking industry. Indeed, they are already
"This is a classic missing the forest for the trees, looking at the
charters," said Karen Shaw Petrou, managing partner of Federal Financial
Analytics. "Who needs a charter? They can offer the structural equivalent
Amazon has done more than $1 billion in small-business lending since it
first started offering loans. In 2017, it launched Amazon Cash, which
effectively allows it to take cash deposits from customers via ubiquitous
convenience stores like 7-Eleven and Sheetz. Other tech firms, including Apple
and Samsung, offer their own payment apps.
It's not clear what tech giants have in store next, but they will likely
push the limits of traditional finance. It's not hard to imagine the Bank of
Alexa, enabling customers to move money and pay bills just by shouting at the
Amazon Echo in their living rooms.
The barbarians aren't at the gate anymore. They're inside the walls.
Some see a massive break looming in the banking business.
In a report issued in late 2017, McKinsey & Co. predicted a split
between "manufacturers" of banking, the core business of financing
and lending that is hard for tech firms to replace, versus
"distributors," the origination and sales side of the business where
outside competitors have an easier time entering the system.
If banks effectively end up as utilities to larger tech firms, they will
lose out. McKinsey forecasts manufacturing will produce only 35% of profits in
finance, a return on equity of 4.4%. Distribution, meanwhile, will produce 65%
of profits, with a return on equity of 20%.
"As platform companies extend their tentacles into banking, it is
the rich returns of the distribution business they are targeting,"
McKinsey concluded. "And in many cases, they are better positioned for distribution
than banks are."
Most experts agree that banks still have three key advantages: the sheer
ability to manufacture finance, which isn't easy for tech competitors; a mound
of data on customers' financial activities; and customer trust.
"When it comes to customers' decisions about where to place their
money, research shows that banks enjoy greater trust than tech companies,"
the McKinsey report said.
But tech companies are putting pressure on banks in all three areas. A
recent survey by Bain & Co. put Amazon and PayPal nearly as high as banks
in levels of customer trust.
Remember that theoretical Bank of Alexa? More than 25% of U.S.
respondents in the Bain survey said they would consider using
"voice-controlled assistants for their everyday banking." And Amazon
dominates that market. On Cyber Monday 2017 — the largest single shopping day
in the company's history — the biggest-selling item was the Echo Dot, its
entry-level Alexa speaker. That's a lot of voice-controlled assistants already
in bank customers' homes.
Amazon, Google and Facebook are sitting on their own pile of data that
includes everything from what customers already own to what they secretly covet
(via searches online). There's no doubt that tech companies are eager to find
ways to exploit that information in the financial services arena.
Some analysts argue that banks have squandered their data advantage.
"Who owns the customer?" asked Petrou. "Who owns the
data? Banks assume they do. They haven't capitalized on it."
So what can banks do in the shadow of Amazon and others' moves into
For one, they can stop focusing on distracting fights about bank
charters. Federal regulators are unlikely to grant one to a Silicon Valley firm
in any case — and those firms don't need one to take away business from banks.
More important, banks must stay in the forefront of customers' minds. In
consumer trust, they are still winning. And while that advantage is eroding,
it's not gone yet. And for tougher credits, it may never fade.
"Small banks succeed because they are in their communities dealing
with the tough credit issues that nobody else wants to solve," said Howard
Headlee, the head of the Utah Bankers Association. "Amazon and Google
aren't going to do that."
Banks also need to continue innovating. Customers want to go to tech
firms only if they are offering something they can't get at their own bank.
Even McKinsey said banks are making strides there. Both JPMorgan Chase
and Wells Fargo recently launched mobile-only banking apps with an emphasis on
making it easier for customers to interact.
Through strategic partnerships and a focus on customer service, banks
may not be out of the running yet — with or without Amazon or Google trying to
enter the business.
"It is not too far-fetched to imagine a day when banks will offer a
range of services, reach a vastly larger customer base, and succeed at their
digital rivals' game," McKinsey said in the report.
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