The world’s top consultants are sounding the alarm, urging the banking industry to brace for the impact of big technology companies like Amazon and Apple barging in. McKinsey is the latest to warn that while the threat of fintech startups seems manageable, a more daunting challenge looms from giants like Facebook and Amazon now bearing down on the financial sector.
The biggest technology players are eroding the boundaries between industries “as they seek to be all things to all people,” according to the McKinsey report. The biggest Asian tech firms show why banks should be worried: Rakuten, Japan’s largest online retail marketplace, runs one of the country’s largest online travel portals and its messaging app (which can suggest shopping items based on your recent chats) has about 800 million users. The company also issues credit cards and offers mortgages and securities services. China’s Alibaba is another big e-commerce company that also does brisk business as an asset manager, lender, and payments firm.
Tech companies are breaking into finance more slowly in the West, but it’s happening. Amazon now provides loans for small and medium-sized companies. Facebook is integrating person-to-person PayPal payments into its messenger app, and Apple will allow iMessage users to send cash to each other.
Traditional financial firms, meanwhile, rely on these technology giants for “strategically sensitive capabilities,” such as cloud computing, making them vulnerable if they end up in direct competition, according to the World Economic Forum. The banks’ histories may not help them win over the next generation of consumers: 73% of US millennials say they would be more excited about a new financial service from Amazon, Google, Square, or Paypal than from their bank, according to McKinsey. About one in three say they don’t need a bank at all.
McKinsey describes the biggest risks for banks as the “four horsemen of the e-pocalypse.” That includes disintermediation, where financial firms are cut off from their customers by an upstart like Lending Club. Perhaps a bigger concern is that their businesses gets unbundled; right now they might lose money on checking accounts, but make the money back (and then some) when customers return to the bank for mortgages. That could be difficult to sustain if everything is routed through a messaging platform that banks don’t control. This leads to the two other big risks, of being left to compete solely on low-margin, commodified services and, ultimately, “losing brand awareness and becoming invisible as consumers can access financial services without knowing the brand,” McKinsey notes.
Not all is lost for the banks. McKinsey suggests that greater competition will put pressure on banks’ profitability, but does not represent an existential threat for the sector. One reason technology firms have been slower to encroach on financial services in the US is because they have to navigate a fortress of financial regulation. Banks, meanwhile, are skilled in risk management and have immense amounts of customer data they can use to develop better services (if they can find a smart way to sift through it). There are opportunities for financial companies if they can keep up with the times.
Another thing banks have on their side, McKinsey says, is that people still trust them with their data—they are ahead of tech companies here. As Royal Bank of Canada CEO Dave McKay told the Financial Post: “Trust and security are key assets. They buy us time.”