AltFi's David Stevenson reveals why he is sceptical that the likes of Amazon, Google and Facebook will be eating fintechs' lunch anytime soon.
We’ve come to the end of the year and the newspapers are full of the usual end of year predictions – I’ll shortly be filling my own quota in the usual outlets. Most of these editorial space fillers can safely be ignored but I do tend to spend more of my own time on the output of commentators such as the excellent Ian King at the Times, who can usually be relied on to get most business trend spot on. Helpfully he recently identified one common fear meme – that the tech giants and Amazon in particular will eat the financial services industry alive. Here’s Ian’s excellent prediction for 2018 - “Amazon will enter financials services in a big way. It will not become a fully regulated bank but it will start to offer a number of services. It already makes loans to smaller and mid sized companies and in some European markets has a “pay with Amazon” service similar to Paypal. It has also partnered with organisations such as Capital One to allow customers to transact with it via Amazon’s Alexa service. More trusted than banks and owning more data on customer transactions than almost any organisation on the planet, it could wreak havoc on the financial services sector”.
This is all fairly measured stuff, echoed around the web and at any number of finance conferences – one of the last sessions at the up and coming AltFi London event on March 26th next year for instance is on exactly this subject. The core argument sounds incredibly persuasive – big data wins, helped along by the intensive nature of customer interactions with an ecommerce brand. And truth be told, we’ve heard this story many times before, in other industries. I’ve spent a long time covering the travel sector, which has also been disrupted to within an inch of its life and I can assure you that any number of travel conferences have featured the same topic, usually involving Google eating everyone alive. I’ve even stood up at said conferences and grandly forecast that the giant internet intermediaries called OTAs – Priceline and Booking.com to you and I – would be proverbial toast once Google and Amazon trained their guns on the sector.
Funnily enough, the much-predicted toasting hasn’t happened yet. Many years down the line, Google has had very limited impact on one of the easiest to disrupt industries imaginable. Travel is almost purely transactional and hardly anyone I know has any love for the likes of Booking.Com or Hotels.com. But they’ve survived and prospered despite Google trying to provide travel search results. What went wrong with the bold predictions?
I’d suggest a similar set of explanatory factors within travel will also find an echo in financials services – and stop Amazon from dominating everything in its path. First up the OTAs (online travel agents) have continued to prosper because they are specialists, and make a decent stab at trying to be “whole of market”. It the same rationale that has preserved the power of the digital price comparison search giants (Moneysupermarket,Comparethemarket) – another sector that should have crumbled before the Silicon Valley tech giants. In reality consumers tend to favour those with a proper niche specialism, and are rightly suspicious of Jack of all Trade parvenus. They want the platform with the best rates and widest choice – not necessarily the easiest option.
This in turn reflects the ecosystem of many business verticals. In travel, the hotel giants, car hire outfits and budget airlines all have dense and interlocking relationships with each other that resist domination by one mega competitor. I suspect it’s a similar story in finance. Take lending to SMEs where Amazon, Ebay and Paypal are already active. The first observation to make is that in reality only a small sub section of the business community uses these digital platforms extensively. By contrast most business owners would prefer to use finance brokers to search the whole market for lending, despite the fact that many commercial finance brokers provide questionable value add. Over in the customer finance space, again we encounter intense competition, not least from the supermarket brands who have made a big push into the banking market. Again, supermarkets have deep and extensive relationships with customers (helped by big data) but brands such as Zopa and Ratesetter have continued to thrive, building their USP not on the lowest prices or deepest customer interactions but on behavioural value adds such as speed of decision making and flexibility of product pricing.
Sticking with the supermarket theme, relationships also matter. Amazon has a model that is similar to the Tesco’s of the world – lots of data, lots of customer interactions. Tesco has certainly built up its bank, which is now profitable and highly competitive. But it isn’t omnipotent. Put simply most customers of Tesco’s don’t shop on price and brand alone. The nature of the brand and the trust they put in it are equally important. I know many people who will choose to pay an extra amount of money because they like building a relationship with an a brand. I rarely ever hear this about Tesco – it may be efficient and price competitive but it is rarely loved. I’d say the same applies to Amazon. I use it, rate it but don’t love it. I can’t quite say I even trust it. And I certainly wouldn’t want to deep a relationship with it – unless of course it was insanely cheap!
Which brings us to the next observation. Amazon could become omnipotent by destroying everything in its wake through the simple practise of pricing its financial products cheaper than everyone else. But its huge resulting market share would firmly put it on the regulatory radar - and central banks might as a result force it to become a bank. That would involve the e-commerce giant in all sorts of regulatory challenges, not least the maintenance of a large capital base. I agree with Ian King, that Amazon probably won’t become a bank, largely because it will work with existing ecosystem providers who have gone through all the regulatory effort. But that implies it’ll remain a niche provider of financial products to a smaller group of people, all done via partners.
The last point is I think the biggest challenge. It seems to me that the likes of Google and Amazon are in danger of becoming toxic, tainted brands. There is a growing revulsion at some of their practises and their brands are looking vulnerable. I have a growing sense that many younger customers for instance will go out of their way to deliberately NOT choose the tech giants and their financial products. This alone might prove a check to the e-commerce giants ambitions.