In between pauses at the WWDC, Apple announced it will be expanding their financial services strategy by going beyond Apple Pay and issuing virtual payment cards to all iOS users. There are 1bn iOS users around the world. At the same time, this same week Amazon made headlines by having lent over $1bn to third party sellers on the Amazon marketplace. Amazon has also rolled out a highly aggressive credit card offer with Chase, which offers 5 per cent cash back for its Prime customers. Neither company is a traditional financial services company. So what is going on?
Due to complexity and benefits of scale, banking has historically been confined to incredibly large companies and their global operations. Sure, some are stronger in some segments or regions, but this is the broad definition of an incumbent sector. What technology has allowed over the past years is the specialization of software and therefore service providers. No longer do you have to have one stop shops for everything in finance, you can actually challenge high margin verticals, e.g. payments or foreign exchange, with a standalone business in just that market segment.
Policy changes such as PSD2 play directly into this trend, setting requirements on financial institutions to open up their infrastructure in order to allow third parties access to their core processes. With globally interconnected institutions, the race into API Markets is well underway, with organizations such as BBVA, DBS, US Bank already far along.
With these trends ongoing, we also find many new organizations entering finance, such as Facebook, Google and Amazon, as mentioned earlier, with a lot of personal data and connections to billions of people. It creates a perfect setting to offer a financial service, when the habits of the individual or merchant in question are known and the service, e.g. a loan can be offered at the point of the transaction in near real time. The $1bn loans issued by Amazon is a testament to this, but so too is the fact that you can send money via Facebook Messenger at the click of a button (at least in the US). Financial services are becoming increasingly embedded.
The digitalization of finance is a wide-ranging theme. In addition to the companies discussed above, established banks are also modernizing their products and services, or how these products and services are offered.
It seems there are two ongoing trends in different directions: 1) toward more integration of financial products in non-banks and 2) toward specialization within financial institutions. The latter may be less prominent, yet with PSD2 and pressure on margins, institutions will likely need to choose the businesses they want to invest and compete in.
Is a bank where you place your money? Is it where your home mortgage comes from? Is it where your wealth advisor sits or who sends your payment remittance?
Through specialization and an embracing of the API economy, we can expect that the future consumer will have several parties that serve their ‘banking needs’. Some of these will be companies like Amazon through the increasing position and information they hold in the market and some will be traditional banks such as Wells Fargo.
Fast forward long enough, and it becomes an interesting thought experiment. Which grows in prominence, the higher margin specialized businesses or the one stop shop business that also faces the highest level of regulatory scrutiny?
One thing is however certain, our concept of a “bank” is quickly becoming outdated. The bank emerged during the industrialization and has had a central role in shaping societies. Are we at a different point in history where the next paradigm shift sees information technology giants as playing a further pivotal role in shaping the societal development and if so with what implications?
The “embedded bank” seems like the direction of the future. Embedded in points of interaction and specialized services, riding on the API economy and truly integrating into the customer’s life and habits, rather than serving as an interruption. How we get there is a true technological adoption across the sector over time, that places the consumer in control of their data and privacy and allows for real time decisions at the consumer’s fingertips.
With these weak, yet highly significant data points, we are past a theoretical discussion. Financial services will more and more come from non-banks and what a bank exists to do is fundamentally evolving.