Fintech start-ups were once viewed as an existential threat to the banking sector. In fact, both parties have found value in collaboration, combining the agility and customer experience of fintechs with the scale and deep pockets of the banks. But another disruptive threat looms: Big Tech. After a dip last year, the tech giants are once again investing heavily in fintech, according to new research from CB Insights.
Covid-19 was by no means the genesis of digital banking but it seems to have caught many established banks by surprise. Startlingly, 54% of executives at US mid-sized banks surveyed by Cornerstone Advisors admitted their institutions had not started their digital transformation efforts before 2020 and 12% said their banks still have no digital transformation strategy – and don’t have a plan to develop one.
These bankers cannot claim there was no warning that digital disruption was on its way. Fintech start-ups have been winning VC investment – and customers – for years, in many cases reaching corners of the market that are underserved or excluded by the traditional financial services industry. For a time, it was customary for experts and industry insiders to describe fintech as an existential threat to Big Finance.
Eventually, though, banks and fintechs sought ways to collaborate. Traditional financial institutions sought to emulate the seamless digital customer experience that made fintechs so popular, while fintechs reached for banks' loyal client bases and massive investment resources. This year, two-thirds of US bankers saw collaboration with fintechs as important to their organisations up from 49% in 2019.
This does not mean that the threat of disruption has gone, however. Technology heavyweights such as Google, Apple, Amazon and Facebook have invested heavily in fintech – in the form of both internal project and external partners – in pursuit of new revenue streams. By combining the digital agility of start-ups with the customer base and scale of traditional banks, Big Tech could prove to be the real existential threat to the banks' survival.
While Big Tech investment in the fintech sector slowed down in 2020 amid the pandemic, it is poised for a rebound in 2021, according to data by CB Insights. The tech giants' venture arms poured close to $1.3bn into fintechs between 1 January and 10 June 2021, the research provider found – around 60% of the $2.15bn they invested throughout 2020,
While tech majors partnering with traditional financial institutions to embed banking into their services, as in the case of Apple's joint credit card with Goldman Sachs, this symbiotic relationship does not mean that banks are safe from disruption. Big Tech's focus on investment in fintech speaks to its ambitions to bring more financial offerings in-house, CB Insights' analysis suggests.
How is Big Tech encroaching on financial services?
So far, Big Tech's move into the financial arena has focused mostly on payments. Facebook, for example, has used the past year to consolidate its payments strategy across its platforms, including Instagram, WhatsApp and Portal, for example. It has also leveraged Instagram's position as the top app to follow brands in its push toward e-commerce with the launch of its Shops tool, which allows merchants to easily build free online shops on Facebook and Instagram. While CEO Mark Zuckerberg admits that Facebook still has "a long way to go to build out a full-featured commerce platform" across all its services, he insists this is what he wants to achieve.
Apple, meanwhile, has used the launch of the Apple Card in August 2020 to further its transition from a hardware to a software and services company. It already offers a growing variety of news, streaming and other entertainment services, in addition to online and POS payments. With the acquisition of Canada-based startup Mobeewave in July 2020, it made a major step toward turning its iPhones into contactless payment terminals. In the meantime, Apple Card has been hitting milestone after milestone, reaching 3.1 million users in March 2020 and then more than doubling that with 6.4 million users in May 2021.
But Amazon is moving more directly into traditional banks' territory, offering credit cards, checking accounts, loans and insurance. CB Insights theorises that the online retail giant is essentially building a bank for itself by tweaking elements of traditional banking to serve the needs of its merchants and customers. This would allow Amazon to benefit from increased e-commerce activity without the need to adhere to the stringent regulations actual banks are obliged to comply with.
While Big Tech is facing a barrage of regulatory scrutiny around the world over its practices on the technology front, it has so far been spared the same level of attention from financial regulators. Until this changes, traditional banks would have a strong incentive to step up partnerships with tech majors, both to adopt some of their best practices and to maintain positive relationships with potential rivals.
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