We shouldn’t be surprised that Fintech firms are pioneering the current wave of mass digital adoption. Account management, payments and identity verification are just three areas where digital technology has and continues to augment products. In the past decade, much of the innovation has decoupled from the mainstream. Firms in hubs such as Stockholm and London have been at the forefront of pioneering fresh ideas and translating them into new consumer-centric tools. Now, as the industry matures, mainstream Tech firms are looking to add their heft into the mix: Will they overpower the relative minnows swimming in the Fintech waters, or will their efforts sink without a trace?
This analysis should start by looking more closely at why Fintech is now such an attractive landing ground for Big Tech market entry. A decade or more ago, financial services provision and innovation were very much in the hands of large global banks. The 2008-09 financial crisis was a catalyst for depolarisation of financial services and resulted in the break-up of many large banking groups worldwide. The industry, through necessity and regulation, was forced to slim down and focus on ‘core’ activities. This retreat offered up a fertile breeding ground for a new genre of Fintech firms to build into an era which was already being shaped by increased consumer digital uptake. In areas such as retail FX, firms such as TransferWise made it their mission to end the rip-off most of us faced exchanging money for holidays and foreign purchases. In the consistently tight SME corporate credit market post-crisis, firms such as OakNorth have stepped up to offer new funding solutions. These have been vital to oiling the cogs of economies around the world. In the past few years, the way we pay for goods has been turned on its head by firms like Klarna. Added up the global Fintech market was estimated to be worth around $90B in 2019 – incredible given its still nascent status. Moreover, growth forecasts are not only not diminished by the C-19 outbreak, we amongst many others believe they will be enhanced because of it.
The FAANGs are now circling the sector and we know they have an insatiable appetite for all growth opportunities. Nonetheless, Big Tech should bear in mind that many Fintech firms now have teeth of their own: The term ‘Unicorn’ is still quite new and can often be misused and merely highlight fad-driven valuation discrepancies. Despite this, many Fintech firms have huge global footprints. Ant Financial and SoFi are giants who can hold their own in terms of size and resources with virtually anyone. Moreover, innovators and disruptors like Mambu and Tink are changing the landscape of retail financial services by plugging into paradigm change, like Open Banking. The latter as an example, have so far proven to be reluctant to stand aside and allow ‘bigger boys’ to steal their lunch money. Despite this, one must conclude that Fintech remains fundamentally a blue ocean segment. Overall, it is still characterised by small and medium-sized firms continuing to innovate and create new products to meet both emerging and historic consumer problems.
Looking at their moves so far, Big Tech firms don’t seem to be interested in joining in at the cutting-edge end of the spectrum. If we dismiss the [now surely doomed] megalomaniacal motivations behind Libra, the FAANGs have been most active in consumer credit. Issuing a white label credit card via Investment Bank X can hardly be said to be re-inventing the wheel financially. Indeed, the stated aims of their forays so far have been to support growth in their core strategies, rather than diversifying strategically into FS per se. Amazon, unsurprisingly, has been somewhat more pioneering in offering a broader range of FS products and services globally. However, so far these have tended to focus on developing rather than developed markets. Microsoft has followed a more nuanced approach. Keenly aware of their big corporate clients [banks] business models, they will not seek to compete head-to-head. The Azure platform, with its vibrant eco-system, offers up a clever way for them to ‘build’ a significant FS presence without rocking the applecart. Apple and Google have certainly been integral in moving payments facilitation forward with their various ‘Pay’ utilities. Still, much of the real new tech building the future of payments remains in the hands of Fintech firms.
Our continuing digitalisation means that Big Tech will surely seek to expand horizontally into more facets of our lives. As noted above, so far FS expansion has been tactical rather than strategic but headline-making valuations like Square’s will surely prove too tempting to ignore. Commentators have speculated that Square has the potential to capture 20-25% of the retail current account market in the US over the coming decade. For a 10-year-old company, that would be a phenomenal achievement. Big Tech will surely need to pivot deeper and further into FS as native expansion in traditional verticals becomes more challenging.
Before they do, they should beware of some cautionary tales. Post credit crunch, the UK financial services sector was primed for strategic market entry by some huge retail brands. Both Tesco and Sainsbury’s, two huge British retailers, invested enormously in their financial services arms, anticipating that they could lock-in huge consumer dissatisfaction with mainstream banks. Today, Tesco has already sold-off their mortgage book whilst Sainsbury’s is seeking to follow suit. To be honest it’s very difficult to specifically account for their failure. Challenger and Neo banks have emerged to provide more competition to the incumbents, but none have had the same presence and brand advantages. Does this mean that pivoting into FS for Big Tech will deliver similar results?
If they can avoid the apathy trap which characterised the retailers market entry, then no it will not. Big tech can leverage their unlimited resources to build new financial services products and services, for the good of us all. We believe existing Fintech firms should welcome the FAANGs to the party. The smaller players will always seek to exploit innovation and should be agile and flexible enough to continue to disrupt unabated. These firms will become prime acquisition targets for Big Tech firms; if their track record & playbook remains unchanged. The larger players have a significant product and channel experience which won’t disappear. Indeed, it’s likely that these firms will continue to support Big Tech entry through B2B solution delivery. It’s hard to conceive that large consumer Tech firms will desire to build the full operational capacity to natively vertically integrate financial services into their offerings in the near term. A vibrant market to be the next ‘white label’ supplier to support a big tech financial services pivot is already in the root.
As our lives become increasingly digital, the firms which have principally been responsible for that digitalisation will naturally seek to grow their presence in our lives. Pivoting into financial services is not trivial and requires effort and commitment to building successful franchises. Fintech firms should not fear this – the impact of world-leading brands ‘creating’ new digital financial services products can only be positive for us all. Incumbent financial services firms should perhaps look more warily at the impact this will have on their environment and business models.