Fighting Big Tech – banking’s biggest threat

As funding dries up for neo-banks and questions arise over their capacity to secure account balances from the many customers who have opened digital-only accounts in recent years, it looks as though Big Tech players could prove the biggest threat to established banks’ business models.

The signs have been there for years, from Amazon launching its own loyalty-enhanced credit card through to Apple’s Savings Account and Credit Card – both in partnership with Goldman Sachs.

There have been mistakes, too, notably from Meta/Facebook with its abortive Diem digital currency, and anti-trust suits launched against Google, Apple and others relating to payments.

“After a long period of slow change, banks are shifting their digitalisation approach.”

Nonetheless, the sheer revenue-generating capacity of these organisations, their vast customer base and piles of cash all make them serious contenders for the crown in retail banking and payment services.

To date, banks have responded in a somewhat piecemeal fashion: for sure, they’ve upgraded their user experience in the digital channel (arguably at the expense of the in-branch experience) but otherwise we’ve seen little movement – especially not when it comes to banking tech stacks, which remain woefully outdated and incapable.

Stories reach Payments Cards & Mobile of tech stacks that are going to have to be shut because they can’t handle Buy Now, Pay Later transactions, or wouldn’t pass muster for a PCI DSS certification.

On the bright side there are, at last, signs that banks are changing course.

From DIY to partnership

A new study from Tenemos shows why banks are taking a fresh tack.

While banks still see the PayPals and Amazons of this world as a threat, they’re more concerned at the threat posed to their business model by Google, Apple and Facebook as tech disruptors.

And to fight back, they are rethinking their future not as direct providers of payment services to consumers, but rather as payments enablers for a new generation of fintechs.

Whereas the last decade has seen banks try to develop their own payments solutions (think Barclays’ doomed PingIt app) or more successful multi-bank new technologies such as Norway’s VIPPS or Sweden’s Swish, the present and future appear to be very much focused on bank/fintech partnerships, buyouts or, most interestingly, the mutual provision of the right service at the right time.

“It’s faster, cheaper and easier for banks to onboard modern versions of services they used to offer in analogue.”

Take money transfer as an example.

Historically, banks ruled the roost in money transfer and were able to get away with margins of 30 bps on transactions, once foreign exchange spreads and fees were taken into account.

Then online money transfer services emerged and undercut the banks, halving their market share.

Fast forward to today, and established retail banks are now partnering with online money transfer specialists such as Wise and CurrencyFair to deliver money transfer services on the bank’s behalf.

Rather than invest in modernising their tech stacks, it’s faster, cheaper and easier for banks to onboard a modern version of a service they have offered in analogue for centuries.

However, this isn’t a one-way street.

Many fintechs lack either the capital, time or skills to invest in areas such as regulation, compliance – or even simply in acquiring a banking license.

Buying in the right software and people to run card or wallet programs can get expensive, too. As a result, the concept of a “bank in a box”, or “banking as a service” is taking off.

Given the dire state of many banks’ back-office systems and the urgent need to replace these systems, it’s likely more of them will turn to fintechs to upgrade their operations in the near future.

Of course, the next question is how – given the state of much of their own technology – banks can then present themselves to fintechs as solutions providers.

Perhaps their regulatory expertise and licensed financial institution status will prove crucial in the fight against big tech.

Time will tell, as in all things.


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