The legacy that is the global banking system has survived challenges to its livelihood from all directions for many years. But new entrants are no longer isolated to financial technology (fintech) start-ups, a simple hiccup. Now entering the battlefield are goliath technology corporations with scale and reach so large and wide that they could shake the industry to its core.
A report from the World Economic Forum states: “Fintechs have changed how financial services are structured, provisioned and consumed, but have not successfully established themselves as dominant players.”
The Wealthfronts (an American robo-advisory firm) and Mpesas of the world might have spurred innovation, but they don’t have the resources or scale to truly threaten the banking industry.
Amazon and Facebook, on the other hand, pack some punch. Even if these tech giants aren’t directly competing with banks generally, their global and daily presence in consumers’ everyday lives, the amount of data they collect about customers, and the reliance of banks on such platforms to drive their business have the potential to forever change banking as we know it.
The Financial Stability Board (FSB) recently said in a press release that big tech posed a threat that should not be ignored. “It is quite explicable by the fact that big tech usually have well-developed wide customer networks and their names are quite recognisable.”
Michael Jordaan, former CEO of FNB and current head of the new digital bank offering, Bank Zero, says: “Banking as we know it will change more in the next decade than it did in the last century.
“Banks are under threat not only from nimble fintech start-ups but also from large technology players such as Facebook, Google or Apple who can leverage their well-known brands, capital, software development skills and large customer base into finance,” he says.
“Admittedly, regulatory barriers such as the requirement to own a banking licence will inhibit large tech players from rapidly taking over the world, particularly as each country has its own set of regulations. But that won’t stop them in large markets such as the USA or the EU, where scale can be achieved due to the large market.
“Then there are innovations such as Facebook’s stablecoin, which will allow free electronic transfers without the need to integrate into the local payments system,” he adds.
As the Financial Times revealed last week, the world’s biggest social network by active users is in talks with the crypto exchange, Gemini, about providing liquidity and warehousing for Facebook’s planned stablecoin, a digital currency pegged to the dollar.
The publication reported that the stablecoin would act as the backbone of the payments system, which is said to be focused on eliminating credit card fees, thus aiding merchants and consumers alike.
“Interestingly, the cryptocurrency may also become an integral part of an upcoming upgrade to Facebook’s ad system, which may reward users for viewing ads and purchasing goods,” reported the Financial Times.
Facebook was also talking to high-frequency trading groups and crypto exchange Coinbase about GlobalCoin, it further said, which CEO Mark Zuckerberg planned to roll out in 2020 so that users could send payments as easily as they could send photos via WhatsApp, Instagram and the like.
“The project will start with about a dozen countries. Facebook hopes that eventually, GlobalCoin could function as a current account for the 1.7 billion adults worldwide who are not formally banked, but have internet access on their smartphones,” it said.
Furthermore, Ethereum World News reported that the social network was also working on securing up to $1-billion in funding from financial services giants, namely Visa and Mastercard, and crypto pundits and funds.
The financing is purportedly for a cryptocurrency and a broader payment network called Project Libra.
By diving into payments, Facebook appears to be trying to replicate the success of Tencent’s WeChat app, which has grown to dominate China’s $4.7-tillion mobile payments market alongside Alibaba, according to Beijing-based consultancy Analysys International.
Says Jordaan: “The best example of what awaits banks is probably China, where AliPay and WeChatPay process far more transactions than the local banks and payments are virtually all done using QR codes without touching the payments system set up by banks. On a recent visit to Shanghai, our local host told me that in China they saw modern Hong Kong as ‘quaint’ in that they still used cash and needed to rely on ATMs and cards when mobile payments were just so much more convenient and free.”
Beyond the GlobalCoin moniker, the BBC reported that testing should begin by the end of 2019 and the currency itself should roll out in the first quarter of 2020.
Rumours that Amazon may launch a similar product have been circulating for years. This week it was revealed that the company had filed a patent in the US for a proof-of-work system that leverages cryptography, on various digital news platforms.
Experts say that an Amazon crypto would allow shoppers to purchase goods at a standardised international rate, eliminating the confusion and volatility of exchange rates. It could free Amazon from region-specific requirements, making Amazon available in new locations internationally.
There are more than 300 million Amazon accounts worldwide, which allows the company to dominate more than 43% of all online sales. Carrying more than 12 million different products and shipping them around the world, these benefits will prove significant.
Retail customers would benefit from lower fees, higher security, and the potential of smart contract facilitated transactions. And of course, suppliers could expect the same benefits on their side, too.
Such a currency would likely be interoperable between Amazon’s many services, such as Amazon Prime, Twitch and Audible.
There are already a number of solutions that allow cryptocurrency holders to purchase Amazon gift cards with crypto.
A Facebook or Amazon cryptocurrency wouldn’t just change the face of these large corporations, but would change the world, says Tanya Knowles, business manager at Adhara, Faculty Singularity USA and the chairperson of SA Financial Blockchain Consortium
With close to 90% market share, the two have in effect disintermediated local and international banks in the process. “The sheer scale that a Facebook coin could achieve should give businesses, competition authorities and central banks some food for thought,” she says.
“Launching virtual currencies on a modest scale has a negligible impact on monetary policy and financial stability. But if a lot of transactions end up being handled by what is, in effect, a foreign currency, central banks might want to think again.”
Facebook has a steep path ahead of it to make GlobalCoin a real threat to traditional banks and currencies, but few companies have ever had the global reach and resources to carry out such an audacious bid.
But not all is lost for the banking industry.
“We see an opportunity to partner with big tech as banks understand the regulatory landscape and product manufacturing capability much better,” says Aupa Monyatsi, managing executive of Virtual Channels RBB SA at Absa.
The agility and innovation of fintech operations should not be discounted either, he adds. “Both banks and big tech cannot inherently provide that. Our view is that it’s about co-opetition (collaboration) and not competition.
The widespread adoption of internet technology, including smartphones and the availability of cloud-based services (such as on-demand banking platforms) has significantly lowered the perceived barriers of entry into financial services, acknowledges Dr Christoph Nieuwoudt, CEO of FNB Consumer. “The business models adopted by new entrants to the market (in South Africa and internationally) support this as they do not incorporate massive capital expenditure on owned branches and data centres.”
“That said, globally there have been very few successful new entrants into financial services, at least from a financial perspective. The two most successful ones (and perhaps the only ones to have reached financial success) are PayPal and Ant Financial (formerly Alipay). PayPal pioneered online peer-to-peer payments two decades ago (auction sites and online vendors allowed it to reach scale), while Alipay leveraged the success of Alibaba in online retailing in China 15 years ago.
“So, the question is why aren’t there additional success stories other than those in very niche services, given the thousands of fintech firms across the globe? We think that this thinking perhaps ignores many of the important reasons driving the success of financial services firms. We believe that customer centricity, trust, scalability, range/scope of offering (for example, integrated financial services) and platform ecosystem thinking, just to mention a few, are major differentiators or at least ones which we spend significant effort on.”
There is no doubt that this is going to be a titanic battle. DM