In The Future, Every Company Will Be A Financial Services Company
The idea of non-banks encroaching into financial services is not new. Beginning in the 20th century, many consumer-facing companies created divisions to offer financial services to customers—mostly in the form of lending.
Ally Financial was founded as the General Motors Acceptance Corporation by General Motors Company (NYSE: GM) in 1919 to provide car loans. GE Capital, the financial services arm of General Electric Company (NYSE: GE), was founded in the 1930s to provide commercial lending and leasing, as well as a range of other financial services.
Eventually, companies like Target Corporation (NYSE: TGT) expanded into credit services (creating the Target National Bank in the 1980s) and Walmart famously tried and failed to start its own bank in the 2000s. In 2003, Alibaba Founder Jack Ma launched Alipay for the sole purpose of helping Alibaba Group Holding (NYSE: BABA) sellers and customers send and receive payments online.
Perhaps these were all signs. Over the last two decades, but especially in the last couple of years, the steady drip of non-banks offering banking-like services has evolved into an all-out flood—with tech companies leading the wave.
Apple Inc (NASDAQ: AAPL) has a credit card. Google (NASDAQ: GOOGL) is launching checking accounts next year. Facebook, Inc. (NASDAQ: FB) has Diem, a soon-to-be launched digital currency. And Amazon.com, Inc. (NASDAQ: AMZN) provides banking, capital markets, and insurance services through AWS. All four companies also offer digital wallets and mobile payments solutions.
It’s About Partnerships, Not Takeovers
Everywhere you look, companies are partnering up with top financial institutions. The Apple Card was launched with Goldman Sachs Group Inc (NYSE: GS). Google’s checking accounts are managed in partnership with Citigroup Inc (NYSE: C) and Stanford Federal Credit Union.
According to a KPMG report from 2018, 26% of financial institutions had partnered with one or more big tech companies, and an additional 27% planned on doing so in the following year.
This is not by accident. Rather than move to replace banks and other financial service providers, tech companies are partnering up with established names to offer new, oftentimes co-branded, services. There are two main reasons for this development.
The U.S. Regulatory Structure
At a time when Big Tech companies are coming under antitrust scrutiny from the Federal Trade Commission, Congress, and state governments, it makes sense that they would want to avoid even more complications via banking regulations.
“We have this crazy two-tiered banking system where every financial service product has the potential of being regulated differently in every single state,” said Phill Rosen, founder and CEO of Even Financial, a B2B fintech company.
Rosen pointed to life insurance agencies as an example, which need to be registered in each state they issue policies. “This means dealing with 50 different sets of rules. It’s not just complicated to manage, it’s also expensive from a labor standpoint.”
By partnering with traditional financial services firms instead of becoming them, these tech companies will aim to sidestep the regulatory minefield entirely. Of course, this is easier said than done. A 2019 bill from the House of Representatives proposed banning big tech companies from operating as financial institutions. And though the bill never made it out of committee, the message from Congress was clear.
This stands in direct contrast to China, which has been (until recently) notoriously lax when it comes to fintech regulation. That has enabled Alipay-parent Ant Group to become the number one financial services provider in the country. Despite its recent failed IPO, the company still sports a valuation larger than every U.S. bank except JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC).
“The headache of getting, and maintaining, a banking license would likely be considered too big a risk for these companies,” said Sarah Kocianski, head of research at fintech consultancy firm 11:FS, in early 2020.
Technology Has Made Partnerships Easier
In addition to the complex regulatory structure, there’s also technological hurdles.
Most non-financial services companies that want to offer financial services will need someone else to provide the technological backend. That’s where technology like APIs comes in. APIs, like those offered by Even, have made it possible for any and every company to integrate personalized financial services for consumers outside the traditional banking ecosystem.
For now, most of these partnerships will involve tech companies. That is because they have what banks crave most (data and brand recognition) and banks have what the tech companies crave most (the credibility and regulatory ability to offer more services to consumers). But soon, Rosen said, the infrastructure will be in place for any company to offer things like loans or credit cards directly to consumers.
“All of these other companies who have inherent consumers attached to their brand are looking to add financial service products,” said Rosen. “And there’s no reason why they shouldn’t. It makes sense for them and it makes sense for consumers.”
The result, said Rosen, will be a unified ecosystem where the walls between banks and non-banks are blurred. This will make it easier for consumers to get access to the services they need when they need them.
“Consumers don’t want to be limited by or restricted to one banking app for all of their financial service needs,” added Rosen. “Instead, they’ll want to have access to banking functions whenever and wherever they need it, regardless of platform or provider. Tech companies are going to make that happen.
Photo by Diego Bernal on Unsplash
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