Why Are the Tech Giants Piling into the Payment Space?
Let’s start with the basics. Most of us have smartphones packed with different apps that enable us to do things on the go. Your wife mentioned paying the gas bill, your children asked for some educational DVDs their teacher suggested buying on their classroom’s Facebook group, and you are looking for a hot deal for a sports watch on Amazon.
There is a natural flow of personal, business, and financial data in our life that gets captured by technology, and that supports our daily activities in a convenient way. Facebook, Amazon, Google, Apple, and their Chinese counterparts, Alipay and WeChat, are embedding payments in context, creating better end-to-end journeys for their customers. They have billions of users and the power to keep those users engaged. They offer consumers more choices and new products and have started to dominate the payments space.
These companies earn a big chunk of their profit by using the data generated by users of their platforms for targeted advertising, by enabling merchants to sell products through these platforms, or by selling products on the platforms themselves. Furthermore, as traditional bank payments have become too slow, unreliable, and expensive for users, big techs have started gaining big market shares and are profitable by providing and configuring financial services that are faster, cheaper, and innovative. In Doing Digital: Lessons from Leaders, Chris Skinner says there are seven new ways finance delivered by technology is changing the game:
- It is real time
- It is everywhere
- It is seamless
- It is personalised
- It is predictive
- It is for everyone
- It reaches the unreachable
We take a closer look at what big tech companies are doing in financial services today.
The GAFAs (Google, Amazon, Facebook, Apple) Are Taking on Finance
When it comes to serving its customers’ financial needs, Google operates the digital payments service Google Pay coupled with Google Wallet. This summer, Google partnered with several banks, including BBVA USA and BMO Harris, to offer digital checking and savings accounts to Google Pay users in the US. The service will be available in 2021. Google aims to give banks a co-branded experience, while users benefit from useful insights and budgeting tools. But the tech company’s foray into financial services doesn’t stop here. In April, news leaked that Google has been working on a smart debit card and checking account service to compete with Apple Pay and the Apple Card.
Amazon, which initially started by selling books, has become a vast online bazaar where you can find anything, from groceries and cleaning products to downloads and video or music streaming. When it comes to financial services, the company addresses mainly the B2B segment with business lending. In 2016, the company set up a student loan scheme with Wells Fargo. Still, it was shut down not long after being rolled out. Learning from its previous experience, Amazon tried again a journey into consumer finance, and in June 2019, the company launched a co-branded credit card with Synchrony Financial, called “Amazon Credit Builder”, targeting underbanked consumers.
In June 2019, Facebook announced plans to launch Libra, a digital currency that addresses cross-border payments, making them faster and cheaper. Libra is a stablecoin tied to a basket of currencies and supported by a digital wallet called “Novi”. Because of its huge disruptive potential (it could influence local and global monetary policies, domestic currency stability, or be used for illegal activities), it has drawn regulatory pushback. Five months later, Facebook announced the launch of Facebook Pay, a service designed to facilitate payments across Facebook, Messenger, WhatsApp, and Instagram. Recently, the social media corporation has also created a business unit called “Facebook Financial”, or “F2”, suggesting its commitment to invest heavily in payments.
Next in line is Apple, with its flagship payments product, Apple Pay. Released in 2014, Apple Pay is one of the most popular and widely-used mobile wallets. According to Statista, as of September 2019, it was estimated that 49% of iPhone users worldwide had activated Apple Pay, an increase from the 33% usage reach in the previous year. This translates to around 441 million Apple Pay users worldwide. Besides providing a digital wallet, the tech company partnered with Goldman Sachs to launch its own credit card in the US. However, unlike its competitor, Google, Apple has not yet offered a full banking service—maybe only Apple Cash, a service where you store your ‘cashback’ credits from Apple Card use, payments from friends, or the cash you transfer in from a connected bank.
But US big tech companies are not the only ones making waves in the payments space. There are also several players on the Asian market that are doing a great job and have the potential to overcome their US competitors, turning the GAFAs into the FATBAGs, or Facebook, Amazon, Tencent, Baidu, Ant, and Google.
Alipay in China has become much more than just a platform for e-commerce payments. Initially, the service was created as a payment solution for its B2C system called “Taobao”, but now it offers a wide range of other financial services, such as travel booking, money market investments, insurance, and loans. WeChat was created as a messaging platform like WhatsApp. In 2013, it launched WeChat Pay, which allows users to perform mobile payments and send money between contacts. Later, the service introduced a money market account to create its own virtual banking system. Now, small merchants can set up app-based business accounts to market and sell goods and services.
The World is Becoming Truly Digital, and Techs Know It
The success of these corporations on the financial market rests on the fact that they are very popular (increased brand awareness), have deep pockets, and deploy the AI and machine-learning capabilities that help them make sense of all the data generated by their user bases.
Big tech solutions rely on the following:
- Use of smartphones or mobile devices that offer customer context and connectivity
- Cloud-based services that provide rapid scale
- Flexible digital architectures that enable capturing data in real-time
- Application Programming Interfaces (APIs) supporting a standardised exchange of data
The More the Merrier
Another success factor for large companies’ popularity is the fact that they have billions of users, and their payment behaviour data can provide valuable information about their preferences. By using big data and AI, big techs understand consumers’ expectations and are capitalising on huge customer bases and loyalty. Their insight into their customers is greatly superior to any financial system. This aspect alone allows them to effectively bundle financial products into an existing ecosystem.
Brands increasingly win their users by providing products and services that are closest to the context/situation where it solves a customer problem in real time. A customer context is a combination of events or circumstances and the touchpoint best placed to do the job they’re aiming to do.
Push Deeper into Finance but Avoid the “Headache” of Being a Bank
The financial services industry is heavily regulated and, traditionally, risk averse. This attitude has determined banks to be more reluctant to innovation and changes and technology companies to develop financial services without becoming a full-stack bank. After all, “the headache of getting, and maintaining, a banking license would likely be considered too big a risk for these companies. Instead, they will continue to operate with licensed partners”, says Sarah Kocianski, head of research at fintech consultancy 11:FS.
Barriers for Big Techs
Due to their size, international presence, financial strength, and IT expertise, big techs may develop into strong competitors to banks and have the potential to create an unfair playing field (as banks don’t have similar resources). This has led regulators to question their practices regarding customers’ data privacy (Facebook in UK), tax evasion (Google in France), and monetary policies (launch of Libra). There have also been worries surrounding the large volume of data these tech companies access and how they intend to use it or potentially sell it. This is a hot topic for customers and regulators alike. Other risks include a concentration of market power at one or a few tech giants.
In the end, the focus should be on the customer, on providing ethical, sustainable, and inclusive solutions that meet our needs and ease our life. We have the technology to achieve these; we just lack a bit of interoperability and cooperation between big techs, banks, and regulators that will hopefully be solved soon.