Big tech vs Big bank: coming soon to your iPhone
I am sure you've had your moments of freaking out when you heard about Facebook being investigated by the US lawmakers or when Google is fined by the EU for "illegal practices" to maintain its monopoly. The pervasive power of big tech makes everybody a little uneasy - whether it is the influence of social media on elections,what they do with the vast amounts of customer data they store, the exploitation of gig economy workers who have no health insurance cover or overtime pay. Vocally weary governments around the world, several US Congressional hearings, and antitrust lawsuits later, ‘Big Tech’ continues to thrive - judging by the Nasdaq 100 Stock Index at least.
In early 2020, Cornerstone Advisors asked banks and credit unions what type of companies they viewed as the biggest competitive threats over the next decade - 61% of the respondents said Big Tech - the likes of Google, Apple, and Amazon!
Back then, Big Tech dipping its toe in the financial services industry appeared to me as another strategy for customer retention. Apple, for instance, launched the Apple Card in partnership with Goldman Sachs - it seemed to me that it was an attempt at making the iPhone incrementally more valuable; an integrated experience, as easy as connecting its AirPods, one didn’t think it was looking to dominate the credit card market - it seemed it was trying to dominate the smartphone market.
And I viewed all other big tech companies - Google, Amazon, and Facebook - nibbling at the edges of financial services as an ecosystem play.
But then, what may seem like a rather late step happened - Apple just entered the hotly contested buy now, pay later market.
For the west, Apple Pay Later marks a pivot point for banks and credit unions. The fear of big tech went from hypothetical to real and hyper-specific. Having set it up as a preemptive payment option, it could potentially impact new account growth and credit and debit card transactions for banks.
This moves means little for India for a few reasons -
Android has the lion’s share of the mobile operating system market in India - a whopping 95.84%; Apple iOS is a distant second, with merely 3.1% market share.
Even for the 3.1% who use iOS, Apple doesn’t accept payments via Indian debit/credit cards thanks to RBI’s auto-debit & card tokenism mandates. This means users who want to make purchases using Apple Pay need to add money to their Apple ID using the real-time payments system UPI or net banking and then use the funds. One too many steps in a world of one-click and scan-to-pay purchases.
Google Pay and PhonePe dominate the cashless payments market in India. With the NPCI giving the NFC (near field communication) nod to Gpay, tap-to-pay at the point of purchase will soon become the preferred method of payment.
While Apple might not be the biggest threat to Indian lenders, “big tech” needs to be observed with caution and close observation.
Let’s start with Google - it started with Project Cache, which marked the beginning of its leap into finance. It started offering checking accounts to Citigroup customers in the US. In India, Gpay entered the market in collaboration with loan providers like ZestMoney, Flexiloan, and IIFL - facilitating credit access via Gpay. There are also investment platforms like Groww and 5Paisa which have integrated with the GPay platform to offer brokerage services. Meanwhile, there are also Indian banks (e.g. SBI, IndusInd, Federal Bank) for whom GPay provides "tokenised offerings" - make debit/credit card payments without sharing card details.
WhatsApp forayed into the digital payments space through Whatsapp Pay. It then rolled out a small business program to offer collateral-free loan offerings. And now, with its newest launch of WhatsApp Cloud API, a free version of the Business API, lending and borrowing are that much easier on the platform.
Xiaomi intends to partner with some of India’s biggest startups as well as lenders to offer loans, credit cards, insurance products, etc
Flipkart expanded its growth capital scheme to lend to its seller partners, which gets disbursed within 24 hrs.
Amazon Pay’s BNPL has secured 2 million customer sign-ups as of July 2021.
As with everything FinTech, there are more questions than there are answers and as always, I’ll leave you with some questions
How far up the stack does big tech want to go? Let’s consider Google. It’s made one thing abundantly clear - the company wants to be an infrastructure and software vendor for banks. Its core offerings are cloud computing, data analysis, and machine learning capabilities that tend to accompany it. How far beyond that do they want to go? Would they build digital identity capabilities for KYC, similar to what Apple is doing? Will it eventually build an ultimate fintech development platform by tying in its Android developer community? Serve its app developers better - a task Apple continually struggles with.
Is big tech best positioned to capture the risk-reward tradeoff? India’s digital lending market represents a $1 trillion opportunity in the next five years - essentially making it a no man's land with scores of players attempting to capitalize on it. But, lending is risky. In a country with a bad loan ratio in double digits, mitigating risk is a priority. But one would think that tech companies are perhaps the most ideally positioned to analyze data to best assess risk. No? Big tech especially has an advantage thanks to the massive scale of its operations, cash-rich reserves, brand identities, and cross-industry presence. What they don’t have is regulatory approvals, insights into the ground zero of India’s credit market, and the required years that it takes in continuously optimize credit risk models and fine-tune them.
What are the practical and regulatory limits on big tech in finance? The current FinTech wave in India and around the world is driven through a partnership model where regulatory licenses can be rented or borrowed as players tie up and pool capital, technology, users, and licenses into a consumer product. This becomes increasingly difficult as a space for a pure technology company - no matter how big - to come and conquer, especially with the regulatory vigilance increasing around the world. Financial services are severely more complicated a space than a cab booking service but if Uber and Airbnb have taught us something - it’s that regulatory gray zones don’t last for long and end up hurting more than helping. On the other hand, the potential impact of big tech is significantly larger than FinTech due to its global reach, scalability, and vast resources. Can big tech get into credit risk assessment? Will big tech eventually morph into big banks? Should we take lessons from Xi’s China on how to regulate big tech?
Should we be worried about big tech? Here’s the thing - we’re a country that’s used to living on the edges of the formal banking system. Kirana stores have been maintaining hand-written ledgers, extending short-term credit, and underwriting based on familiarity. The sub-prime segment of Indian consumers is all too familiar with credit-based buying albeit offline and non-formal.
So what’s the value added by big tech? It’s hard to think of a core value proposition than perhaps reach and active users running into crores but WhatsApp Payment’s experience has shown that it counts for little when there’s not enough regulatory tailwind to get the timing and product just right.
There are nearly 118 crore mobile phone users in India, and more than 44 crores of those use feature phones. Given this, who do you think is better positioned to serve those 44 crore users? Big tech, Fintech, or banks? Can any one of those reach the 44 crore users without collaboration with the other?
I’ll end it with this - I think the modern source of the anxiety around big tech and Fintech is all Bill Gates’ prophecy in 1994 - “banking is necessary, banks are not”.