Fintech startups have been working to overtake the stronghold of traditional banks on the financial services industry for several years at this point.
And to some extent, they’ve been successful. However, it’s the so-called “platform companies” that banks need to keep an eye on.
And there’s the fact that a growing number of millennials believe that tech companies could feasibly wipe out traditional institutions and replace them with their own take on financial products.
Every so often, new moves by Apple, Google, Amazon, and Facebook make headlines for their latest foray into finance. Think Apple Pay or Facebook’s relationship-building attempts with banks.
But, what’s on the horizon? Are we looking at a future where we buy our homes on Amazon or apply for auto loans using a social credit score?
Here’s a look at what’s happening with the platforms.
How big tech is making a play for your wallet
Convenience and branding bring big advantages
According to an Accenture survey from 2016, one in three banking and insurance customers would consider switching their accounts over to Google, Amazon, or Facebook if it were an option. And a report from Bain and Co. suggests tech companies are succeeding where alt-finance failed for a few reasons.
For one, tech firms already have the name recognition, trust, and the massive customer base required to drive change. Fintech startups, by contrast, had more niche appeal than anything and can be hard for the average consumer to understand.
It makes sense that Amazon could start successfully offering loans alongside bulk paper towels and unauthorized beauty supplies. It’s easy.
As American tech companies are wading into the banking space, Asian companies are diving in. Japan’s Rakuten, the country’s largest online marketplace and messaging app, already offers credit cards, mortgages, and securities services.
China’s Alibaba also functions as a lender and payments processor and AliPay and WeChat Pay are massively popular payment platforms that sidestep traditional banks altogether.
From Facebook to Apple, what’s big tech got planned for our wallets?
Facebook started dabbling in payments back in 2015 and hired PayPal’s CEO to lead its messaging products group and added the ability to send payments to friends across the platform.
Then last year, the social networking behemoth enhanced the platform by allowing people to use PayPal as a funding source.
Which—fine. Square Cash and Venmo work more or less the same way. Plus, PayPal made similar deals with Slack and Skype anyhow.
But over the past year or so, the noise about tech giants making a play for the banking space has gotten louder—which left us wondering, is something big planned?
In August, we learned that Facebook was trying to climb deeper inside our collective wallets, and now, Amazon and Apple are doing the same.
Apple is in the midst of launching a credit card with Goldman Sachs, while Amazon is working on a peer-to-peer payments function where you can just tell Alexa to send money to a friend.
The big push into finance makes a lot of sense. Americans are increasingly using online banking—as well as taking advantage of convenience from things like Venmo, mobile deposits, and so on.
Facebook’s whole deal was more about streamlining existing payment platforms than creating their own payments infrastructure.
The benefit for Facebook is, despite the fact that they’re not creating new products, they will gain access to new datasets. And that’s where banks will lose if they don’t embrace automation and faster processing.
Why banks need to worry about losing data
When you move small payments and transactions into Facebook Messenger or the WhatsApp chat box, it’s those apps reap the real reward: data.
And banks, of course, lose out on that valuable resource.
While it sounds like a real “who cares” situation, there might be a cost down the line.
When banks don’t have data, they have a hard time developing new financial services and delivering accurate risk mitigation. Meaning, we might have to place our trust in big tech instead.
And after Facebook’s myriad privacy gaffes, it might be a pretty big risk. On the customer side, those who continue to use traditional financial products may see lower quality offerings.
For example, it’s harder for banks to identify risks without access to large datasets—which could impact investments down the line.
While we’re still enamored with our devices, many of us are starting to look at tech giants through a similar lens as we viewed big banks and Wall Street.
Platform companies have huge power as it stands. They’ve provided the infrastructure powering the gig economy and the sharing economy, which have had significant ripples throughout the economy-economy.
While financial products are bound to get better when reimagined by tech, there’s the risk that too much power falls in the hands of this small group of companies. Banks need to respond with better products and an improved customer experience — or risk the same fate as taxis or travel agents.