Why Tech Titans Are Now A Big Threat to Banks

• Why Alibaba Could Be The Next Banking Giant
• The Biggest Story for Investors in 2017

The global financial industry as we know it is facing a great existential threat. New disruptors are challenging at every level of the financial stack.

• Robot-analyst Kensho outperforming human analysts at Goldman Sachs.

• Blockchain start-ups streamlining global payments and back office settlements, slashing jobs and billions in costs in the process.

• Uber, which offers bank accounts to new drivers, is now the largest acquirer of small business bank accounts in the US today.

When Goldman Sachs published their ‘Socialisation of Finance” study last year, they listed social networks, millennial lifestyles, big data analytics, mobile accessibility and new funding models among the factors that are overturning the global financial order, putting nearly “$5 trillion of revenues and $5 billion in profits at risk”.

They ignored the real threat however.

Over the next year, we will see the big internet dogs playing an increasingly pivotal role in banking and financial services. The likes of Google, Amazon and especially Alibaba have spent several years studying financial services, looking for sectors and services that they can colonise and carve up for themselves.

This is an outcome that the big banks have feared for some time, and they look exposed across the board: from lending to digital banking, wealth management, payments, credit checks and settlements.

Tech Giants Muscle Into Financial Services

These tech giants certainly pose a far bigger threat to banks than the many thousands of Fintech startups.

So far we’ve seen Google Ventures invest in startups across lending, payment security, analytics and blockchain. Google is exploring where it can make the biggest impact, seeking out new ventures at a time when ad blockers are threatening online advertising revenues.

Amazon is offering loans to thousands of invited sellers on its marketplace.

It’s Chinese platform companies, however, who are really pointing the way towards radical changes in financial services. They have identified a gargantuan appetite for “adjacency” services among the hundreds of millions of people using their platforms.

In 2014 the BATs (Baidu, Alibaba and Tencent) were granted bank licenses.

They have since used mobile and social network platforms to become trusted utility providers of transport, taxi booking, home deliveries, ticket purchases and much else besides.

And these services have been integrated into one-stop shops enabled by payments and an increasing variety of financial services such as wealth management and low cost <if highly volatile> money market funds.

In fact, I expect to see this hectic ‘adjacency’ and one-stop shop approach fan out across India, Africa, Indonesia, Malaysia and Latin America — all driven by China’s strategic interest in forging bilateral ‘corridors’ between companies, countries and regions, free of Trump and the US$.

As Frost and Sullivan have pointed out: the commercial world is shifting towards platform-based approaches that integrate information, billing and payment into the services they offer. The banks need to take action fast if they are going to survive and evolve.

Perhaps they’ll recognise that their balance sheets are weighed down by bricks and mortar and start to sell off branches.

They’ll undoubtedly continue to buy fintech startups.

They might even attempt a pivot from away from products to a social network approach.

The issue is that they are facing competition from tech companies that can allocate huge resources to their financial initiatives. And what’s more these tech platform companies are far better placed to foster trust and offer services to those coming through.

There is already a deep mistrust of banks amongst millennials – who’d rather see a dentist than listen to what their bank is saying (Source: Millennial Disruption Index). A lot of young, tech savvy, intensely networked digital natives across the world simply trust code and maths over ‘digital immigrant’ human intermediaries and actors.

FinTech Winner: Alibaba will lead the way

• SMEs are responsible for 60% of the global intermediary good trade according to the WTO.

• SMEs could be responsible for $1.7 trillion of new money flow by end-2018, according to the Disruption House.

• At the moment, SMEs account for about 80% of global output but only 20% of its credit off take, chiefly due to the mainstream banks’ lack of interest in offering them credit in China and everywhere else.

Potentially rich pickings? Enter a primed Alibaba stage left.

Central to Alibaba CEO Jack Ma’s vision is the development of a ‘one-stop shop’ for Chinese SMEs wanting to do business outside China as well as foreign SMEs needing openings and support to sell their wares in China itself.

“SMEs will go to Alibaba for micro loans, working capital,
digital banking, wealth management, payments,
credit checks, PR, marketing, and logistics.”

 The building blocks are in place…

Aliyun, the Alibaba cloud which is now supported by 14 data centres across the world, is showing $224 million, albeit loss making, revenues a quarter, making the fastest growing cloud behind AWS and Microsoft. So Alibaba can support a huge new volume of financial data.

It’s Sesame Credit Management operation is doing excellent business.

Alipay – Alibaba’s online payment service – has 450 million registered users and accounts for nearly 70% of all mobile payments in China, while its Ant Finance affiliate spent $680 million to acquire India’s biggest online payment operation Paytm and bought 20% of Thailand’s Ascent Money.

And, of course, its Taobao and Tmall online bazaars are also thriving.

None of this guarantees Alibaba can solve problems with some investors over its opacity with governance and ownership, however it does offer perhaps the most coherent corporate vision in the world of the future shape of global business and commerce, and how to realise it.

Collapsing trust: the story of 2017

What other Tech Titans might invade finance? Amazon and Google look like the biggest threat on this side of the world.

Amazon already has 23 million users for its payment tools and has always signaled its ambition to be a one-stop shop for all goods that its customers want to purchase. The company is seeking to turn login, payment credentials and shipping information into a seamless e-commerce system for SMEs, offering installment credit and exploiting its financial datasets to undercut banking services. “You can make a 20-30 per cent return on that data without necessarily having to open a branch,” Peter Simon, head of information at Barclays told Computer Business Review.

Meanwhile, Google continues to probe and investigate financial services through Google Ventures. As Paul Schaus, founder of banking consultancy CGG Catalyst, recently pointed out: “Once Google finds its best value proposition in financial services, it could cause the biggest shake-up in the industry of anyone in the market.”

In the wake of 2008, there has been considerable investment in fintech startups with the expectation that financial services could be fixed with apps, peer-to-peer models and services targeted to people that do not interest big financial institutions.

Since then many of these startups have either been bought up or achieved such a scale that they have suffered from problems that will be familiar to bigger financial institutions: p2p lenders falling foul of credit cycles and attempting to flog consolidated loan portfolios to banks, robo-advisors entering a price war with deep-pocketed brokers in the hope they will be acquired before the capital runs out.

The Tech Titans have no such resource shortages and when they enter a market they can wipe out competition because they have the tools and platforms to completely reinvent services.

The bigger story here however is trust. The Tech Titans are launching into financial services at a time when trust in traditional banks, finance, even the financial system itself is destabilising.

Source: British Social Attitudes survey 

This story of collapsing trust runs through a lot of the research I have been undertaking in recent months…

• Collapsing trust in traditional finances: as we witness an explosion in the variety of software that can be used as a money — cryptocurrencies, smart contracts on Blockchain platforms, Kenyans using mobile minutes as credit — we will witness a rush away from traditional finance. Money is a soft technology — it can take the form of coins, notes, cards — but software is a soft technology with an infinite variety of forms, we have only seen a handful emerge so far.

• Collapsing trust in the financial system: there is a growing concern about the scale of Trojan ransomware being discovered across major US companies, which in some instances have been in place, undiscovered, for five or six years. Many data centres used for finance and stock markets could be compromised. My outlier forecast for 2017: a terrorist organisation will take over a major trading firm and crash the world’s markets for hours if not days, costing trillions in damage and funding terrorism for 2017 and beyond.

• Collapsing trust in banks: We could also see a collapse in the power of banks as the information supremacy of the likes of Goldman Sachs is challenged by Tech Titans developing deep learning and applying that AI to extremely rich data sets. Then there is blockchain. Goldman may have recently withdrawn from the R3 Blockchain, but there are fascinating developments underway on platforms such as Ethereum that have deep and immediate implications for banking.

In fact, I think Blockchain deserves its own briefing so I will return to that subject in the coming weeks.

I’ll leave you with an excellent 13 minute introduction to blockchain given last week by David Birch. It cuts through the techno babble and points the way to a radically different banking systems.

You can watch it here

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