In a paper released in February 2019, the Financial Stability Board highlights the potential impact of BigTechs on lending institutions. As per the paper, India’s traditional home ground of the banks stands invaded!
Amazon, Facebook, Google, and Apple, collectively referred to as Big techs, are the tech giants who already command a strong influence on all aspects of lives; they’re foraying into the financial world with their treasure trove of data.
In the bigger picture, therefore, Big techs, with their meaningful insights, loyal customer base, positive brand appeal, and powerful sway over the digitally native generation, hold a distinct competitive edge.
Amazon Lending, for instance, is offering a short term business loan program and has already lent more than $ 3 billion to over 20,000 small business owners who are selling products on its platform, as per a press release by Forbes.
Apple is devising ways to revolutionise the credit card market with a card built on its iPhone with enticing features like low-interest rates and extra data security with negligible fees.
Facebook plans to launch a digital currency called Libra, which could mean extensive financial inclusion and radical change to the economic ecosystem.
Google Pay, whose services have been live since 2015, recently announced an upgrade for a seamless banking experience. The revamped version will offer many new features to its users, including Plex, a mobile-first bank integrated into the app. GPay users could handle their money directly in the app and interact with an online bank.
Google may not be the banking provider but will allow its banking partners to use the GPay as their banking app. As GPay ramps up its retail offerings, it has already amassed over 70 million users in India and popularity is set to rise as per estimates by TechCrunch .
But the question is, will Google’s deeper involvement in the economic scene of the world’s biggest democracy disrupt traditional lending institutions, including banks?
Currently, rendering financial services is only a small part of Google’s global business. However, considering its size and customer base, Google’s entry into the banking sector will be a catalyst for several changes in the industry.
Challenges for the Retail Banking Industry
Google poses a significant challenge to the traditional banks and fintech firms with its powerful infrastructure to seamlessly integrate services and superior customer experience — both bedrock of the new-age digital finance.
1. Nouveau Tech
Google can scale efficiently without legacy lending institutions’ costs with their newly built cloud platforms and modern programming languages.
The digital architecture gives Google an upper hand to create a low-cost pathway to hosting financial technology such as accounts insights and a system that electronically records all the finance-related insights in a mobile or web interface.
On the other hand, banks face difficulties upgrading their IT systems as the overhaul is time-consuming and expensive. Banks are fraught with hurdles in developing new financial products. But big techs with fewer regulatory hindrances, on the other hand, are more agile with the capability to build new customisable products in a shorter time.
2. Digital Platforms Imply greater ‘pivot speed’
The digital architecture allows Big Techs like Google greater pivot speed to build user-friendly products in a short time. The digital platform also enables them to deploy it to a live environment quickly. Big techs integrate AI and ML algorithms for faster deployment to understand consumers and help quicker response time to change environments to build innovative products.
As most people today have 24×7 access to a mobile device, firms like Google who can provide a mobile-only or a mobile-first experience, can garner a significant share of the banking users, reduce onboarding times, conversion costs, and long term acquisition costs leading to a loyalty shift.
3. Customer Experiences
Consumers execute several actions anywhere and anytime using their mobile devices. As per a report by Forbes, users expect platforms to be entirely digitised and mobile-friendly. Today’s loan-seekers expect credit instantaneously unlike months and days in earlier times. The AI-powered applications enable faster allocation decisions.
The changed consumer expectations from the banks have radically altered customer expectations from lending firms.
With their bounty of investment and innovation, the Big techs are giving quicker responses to consumers with round the clock support, autonomous account opening, and many other facilities that legacy banks often dream of achieving someday.
4. Shift in Preferences
Legacy lenders have not introduced a new financial product for a long time other than credit cards. This lack of new innovative products offering, behemoth structure, inability to adapt to change coupled with regulatory restrictions has primarily been the banking system’s growth inhibitors.
This has also prompted the Big techs like Google to introduce financial products to consumers and small business owners to reach consumers directly right where they are. Due to their tech infrastructure, they have access to data that helps them gain insights on creditworthiness, where social data and mobile phone data can be a proxy for credit risk.
In addition, lack of credit history will push the young adults towards Big techs’ offerings as they cannot access products from traditional institutions.
5. Trust and Data Protection
Traditional banks, with their imposing architecture replete with security guards, have always cast an image of trust and security in the minds of users. Banks also rely on measures like privacy protection of the users to inspire this confidence.
This makes the users take their hard-earned money, entrust it to the bank and rely on its service for their financial needs. Banks are able to offer low-cost services due to the vast number of deposits. However, with recent scams like PNB scam or Yes Bank fraud, the faith is on shaky ground.
Big tech firms have won customer confidence with their digital services and wallets like GPay. Google has demonstrated that consumers can share their data for a free or low-cost service similar to banks. This helps them win customer loyalty and successfully pivot to digital financial service resulting from their size and established brand name.
How Can Banks Meet the Challenges?
Banks have previously leveraged technology to foster growth. However, this has been limited to lowering acquisition costs, streamline the customer experience, and assessing credit risks. It is evident that Big tech firms like Google have a significant advantage over banks who will essentially need upgrades to IT infrastructure for sustenance.
Technology can be leveraged to extract insights from customer and business intelligence data collected by the banks.
- Cloud computing can be leveraged to increase efficiency and interoperability.
- ML algorithms allow automation of manual processes such as making credit decisions.
- Using AI to analyse data improves default prediction as compared with traditional credit assessment models.
- Techs like blockchain and Distributed Ledger Technology can improve data collection and record maintenance to ensure compliance.
Banks need to digitise their current business models to reduce costs and retain their attractiveness for users.
Banks may have an advantage due to the lower cost of funding and large-scale branch networks. However, Big techs also have benefited from the network effects, albeit of a different kind.
Though the future of traditional banking based on the human interface may seem threatened, it is unlikely to disappear entirely if banks march on the way to tech upgrades.
Big Techs are here to stay. The disruption for traditional and non-traditional signifies an urgent need to change and adapt to the changing financial ecosystem. Finezza, with its entirely digitised and low-cost finance solutions, can help you increase your outreach. Contact us today, before it’s late.