The Big Four - will Amazon, Google, Apple and Facebook be the better banks?

When it comes to the disruption of industries, you always have to reckon with them: the tech giants from Silicon Valley, above all the "big four" Amazon, Apple, Google and Facebook. All four are united by the goal of binding as many people as possible to their respective ecosystems. They are masters of customer orientation in the digital age. This means that the issue of financing also plays a role. But does their love of experimentation go so far as to penetrate an industry that (in the public perception) is far removed from innovative high-tech? As we have been witnessing the enormous influence of innovative technologies in the financial sector for 20 years, we are particularly interested in investigating this question.

The State of the Public Debate

The rumor mill is boiling

The vegetative nervous system of German-language financial and IT journalism has been rumbling for years. From the now defunct Wall Street Europe to Handelsblatt, Capital and WirtschaftsWoche, IT Finanzmagazin, Börsen-Zeitung, Future Zone and Euro Magazin through to relevant internet portals such as finews.ch, the auditors at KPMG and expert blogs such as the Bank Blog: It's only a matter of time, they have been whispering for a long time, before Internet giants such as Amazon, Google, Apple and Facebook shake up the traditional banking business. That's right. Google has had a European banking license since 2011, as Hansjörg Leichsenring researched for the Bank Blog. [1] With Apple Pay, the technology drivers from Cupertino have created the basis for a complex financial platform and, like Apple, Facebook has applied for a banking license (in Ireland), which is apparently in the process of being approved. The former eBay subsidiary Paypal has held a European banking license from the Luxembourg financial supervisory authority since 2007. Amazon offers its business customers loans of between 1,000 and 600,000 US dollars.

Do the magicians really need a bank?

When Paypal emerged as a new type of financial service provider over a decade ago, the question soon arose as to whether Paypal had a banking license. In fact, Paypal has been in possession of a banking license since 2007. But what about the other tech giants in terms of banking licenses?

Nevertheless, the question arises as to whether the magicians of the digital world really want to be a bank - and whether this is even necessary from their point of view. Is Marc Zuckerberg really planning a "Facebank", fragments of which have been haunting the media jungle for years [2]? Where do the "Big Four", Amazon, Apple, Facebook and Google, stand on the disruptive campaign they are accused of, which, according to Fidor CEO Matthias Kröner, "will sweep over the financial sector like a tsunami"? [3] This much is clear: these are not conspiracy theories that are wafting through the financial world and scaring the living daylights out of savings bank directors.

Amazon as a Bank?

Alongside Apple, Amazon in particular deals in predominantly "real" products. The online giant, which was founded by Jeff Bezos in Seattle in 1994, offers movies and music, fashion and food in addition to selling books - which, according to legend, started in the garage. Amazon deals in cars, produces hardware such as eBook readers, develops games, offers an online video store and acts as a publisher, contract logistics provider, cloud provider and recruitment agency. Amazon's treasure trove, however, lies in its server databases with well over a quarter of a billion customers worldwide.

Amazon wants to strategically stimulate the dormant potential here, which can only be partially exploited and monetized via the trading platform. Initially with credit offers for selected marketplace sellers, as reported on The Memo, the website of the London-based Creative Agenda Group, a publishing house for "topics in the digital age", in June 2015. In the USA and Japan, Amazon had already started issuing loans of up to 600,000 US dollars each in 2012. Last year, the financial service was also launched in the UK and is also available to customers in Canada, China, France, Germany, India, Italy and Spain. According to The Memo, Peter Faricy from the Amazon management board told Reuters that the company wanted to support its most agile business partners on their growth path. [4]

However, the Seattle-based retail giant is getting even more involved in the traditional banking business with its "Pay with Amazon" payment service. As Wirtschaftswoche reports, Amazon is further expanding the service, which allows online customers to process their orders on other retailer websites using their Amazon account. This is convenient for customers: "This saves them having to constantly type in new addresses and payment information." A path that points to the future, as "according to a study by the EHI Institute in Germany, 14 percent of the top 1000 retailers already use payments with Amazon's payment service". As Patrick Gauthier from Amazon Payments explains in the German business magazine, the retail giant is aiming for a future "in which - from small to large - all retailers will process their payments via Amazon." [5]

Apple as a Bank?

Apple Pay

Let's start with Apple. Customers can use the Apple Pay payment system with their iPhone 6, iPhone 6 Plus or Apple Watch. In the USA and the UK, Apple Pay can be used at more than 1.3 million acceptance points. According to a study by the Auriemma Consulting Group, 42% of all iPhone 6 owners already used the financial service in June last year [6]. Since February 2016, payments can also be processed using Apple Pay in China after the USA, the UK, Australia and Canada [7]. Industry insiders report that the IT company has its sights set on Spain, Singapore and Hong Kong as further locations this year and that preparations for the introduction of the payment system have probably also begun in France.

Apple as a financial platform?

Is that it for Cupertino and its foray into the world of finance? Is Apple only interested in providing customers with an alternative to credit or debit cards and ensuring greater convenience? No. Maik Klotz, Head of Business Development at IT Finanzmagazin, takes a much broader view and is certain: "With Apple Pay, Apple has created the foundation for an entire financial platform." The company is more concerned with keeping its customers in its own ecosystem. In a system that is evolving from a multimedia system to an everyday system with the help of financial transactions [8].

Patents and developments point to involvement in the finance sector

Even if no one at Apple really talks openly about the company's goals with regard to its involvement in the financial services sector (as is the case with Facebook and Google), recently published patents and developments suggest that Apple CEO Tim Cook and his colleagues have even more far-reaching plans. In particular, this involves a patent for personal finance management, which allows the provider to offer personalized advertisements and products based on the account balance information of its users. The path to a financial analysis app does not seem far away here. In addition, a patent for peer-2-peer payment, i.e. the transfer of money to other users, is a source of fantasy. This is also likely to be stimulated by Apple's current data protection offensive, according to which data protection is a "fundamental human right". After all, trust and data security are essential for financial services. The fact that Apple has equipped the iPhone with a fingerprint sensor from the fifth generation onwards could fit in with this. This enables secure payment via smartphone.

Facebook as a Bank?

The outlines of a Facebank can be seen in the Facebook universe

The world's largest social network with more than 1.5 billion users is also building on the trust of its customers. Facebook administers its payment system via Messenger in its own secure environment, whereby a PIN or Touch ID can be stored as additional security. Users in Europe will not yet be able to enjoy the new function, which is symbolized by a dollar sign, as they have to register a credit card issued in the USA for the payment process. However, due to Zuckerberg's application for a banking license in Ireland, work is also likely to be carried out on the inclusion of European and international customers, which also includes the issue of a separate virtual "Facebook currency". Interestingly, Sven Korschinowski, KPMG expert for payments, FinTech and digital banking, also assumes that Facebook is pursuing a strategy similar to that of Apple.

Facebook is also primarily interested in expanding its own ecosystem

According to Korschinowski, the global corporation with headquarters in Menlo Park, California, is also interested in keeping its customers in its own "universe". This is at the heart of its efforts to position itself in the digital banking sector. In this context, the direct transfer of money from FB friend to FB friend seems to be just the first step on the way to the bank. After that, users will soon be able to order new products and services via the websites of manufacturers and retailers and pay for them directly. The result: "An enormous trading volume including payments" will be withdrawn [2].

Facebank as a traditional bank?

The next possible steps will be really exciting: If companies also have a Facebook presence, they could process their salary payments via the network and gradually turn it into a platform for all traditional banking transactions. Money would then be transferred, received and managed on the profiles of Facebank users. It would be bought, invested and invested. The next step would be business with consumer loans, which are structured relatively simply. But it's still "would be", "could be", "would be": what Zuckerberg and his financial experts will link up next cannot be shared at this stage.

Google as a Bank?

In a visionary Handelsblatt scenario back in 2013, Google, the third player in the Big Four, was described as the "bank of the future" and the "terror of the financial sector". What if? Where would the world's largest search engine be today in banking terms? [9]

Like Apple, there is an electronic wallet: Google Wallet, the successor to Google Checkout, which was discontinued in 2013. As with Apple Pay, customers can use it to pay from smartphone to smartphone. To do this, the devices must be equipped with a near-field communication chip (NFC technology). Payments are processed using debit or credit card data and Google Wallet makes it possible to pay bills in various online stores. Direct debit is also possible, but not (yet) in Germany.

Google cooperates with Landing Club

The search engine giant has also launched a pilot program for small business customers based on a cooperation with Lending Club, the largest credit exchange in the USA. Capital reports that Google is providing the money for the financing, not other lenders such as private individuals or hedge funds [10]. Obviously, this can be seen as a further step in the Google system on the way to becoming a complete financial services provider. However, the AdWords Business Credit program launched in October 2012, in which Google financed companies up to USD 100,000 in conjunction with advertising, has already been discontinued. In contrast, Amazon Lending, which provides selected marketplace sellers with loans of up to 800,000 US dollars, is probably still active. But, as described: Google has had a European banking license for some time. What is being worked out at the Googleplex headquarters in Mountain View, California, gives endless scope for further speculation.

Conclusion and Outlook

So where are the Big Four heading? Four theses to conclude:

1. the sheer market power of the digital giants, their gigantic cash reserves, the perfected IT infrastructure, the information and service density of their global networks and intelligent customer profiling that is second to none, literally demand a roll-out of global financial services. "Where to invade next?" This question, loosely based on the title of the new film by US activist and left-liberal establishment critic Michael Moore, is certainly justified with regard to the innovative power of the Big Four. Apple & Co. approach things with fresh ideas and massively change existing stolid structures. So why not?

2 On the other hand, the question arises as to whether Amazon, Apple, Google or Facebook really want to become payment service providers with additional and gigantic big data expenses. Even more so with increasingly narrow margins in the banking business. Of course, their new offers for digital money transfers contribute to the erosion of existing structures in the traditional banking business and further weaken the increasingly loose customer contact of established institutions. However, it would be much more elegant than becoming a bank themselves to use the institutions as a back-end system and merely provide the front-end themselves, as IT Finanzmagazin suspects. On the basis of this reasoning, the efforts to obtain banking licenses are also impressively logical: these are a perfect threat to established and potential financial service providers with whom cooperation agreements are being negotiated! By the way: iBank already exists. It sees itself as a financial partner for small companies, is based in Costa Mesa (California) and was founded in 1998 by Tom Markel. So this tooth has already been pulled out of Apple...

3) Facebook is very likely to expand into a bank, as KPMG suspects. The world's largest social network could give the 2.5 billion people who do not use the services of traditional banks access to the financial services market in one fell swoop by simply logging on to the network [2]. According to Marc Zuckerberg, these are to be offered permanently free of charge. The potential for transferring money from migrant workers to their structurally weak home countries, which is currently still handled at high fees via Western Union and Money Gram, is enormous. And Facebook will continue to earn money with its customer data as the basis for profiled advertising. Facebank would therefore not be an innovation with the intention of undermining the traditional banking sector, but rather to offer social network users services in an increasingly homogeneous and comprehensive Facebook universe. The result, however, would be the same.

4 We see even more starting points for a significant entry into the business areas traditionally occupied by financial service providers with Amazon. The number of customers, products and retailers connected to Amazon is superlative - as is their diversity. This constellation opens up all the business areas to Amazon that traditional financial service providers have claimed for themselves in connection with the flow of goods. The intensification of the payment business has already been announced (see above). However, the activities that have already begun in the direction of financing offers for affiliated retailers (e.g. Wholesale finance) are also expected to intensify. This development would follow a trend that we see as the key driver for accelerating the transformation of the financial services sector over the next five years: Strong players on the product side (manufacturers or retailers) are becoming increasingly active in business areas that were traditionally occupied by financial service providers - banks alone. Please also read the position paper "Finance Business Next 2020: Product providers accelerate change in the financial sector".

Sources

1 The Bank Blog (2012). Is the Google Bank coming? URL: www.der-bank-blog.de/kommt-die-google-bank/innovation/4368/
2 KPMG (2015). The "Bank of Facebook": A new universe for banking services? URL: svenkorschinowski.de/2015/11/20/die-bank- of-facebook-a-new-universe-for-banking-services/
3 Reuters (2015). INSIGHT - Internet firms push into banking - "It's going to be awful". URL: de.reuters.com/article/banken-internet-idDEKBN0NT16T20150508
4 The Memo (2015). Looking for a UK business loan? Amazon might be the answer. URL: www.thememo.com/2015/06/29/looking-for-a-uk-business-loan-amazon-might-be-the-answer/
5 Wirtschaftswoche (2016). Future of payment: The money hasn't gone - just somewhere else. URL: www.wiwo.de/finanzen/geldanlage/zukunft-des-zahlens-das-geld-ist-ja-nicht-weg-nur-woanders/13421552.html
6 NFC World (2015). 42% of US iPhone 6 owners use Apple Pay in May and June. URL: www.nfcworld.com/2015/07/29/336853/42-of-us-iphone-6-owners-use-apple-pay-in-may-and-june/
7 iphone-ticker (2016). Apple Pay launches in China: "Potential to become the world's largest market". URL: www.iphone-ticker.de/apple-pay-startet-in-china-potenzial-zum-weltweit- groessten-markt-93037/
8 IT Finanzmagazin (2015). The Apple Banking platform is coming: Apple Pay was just the beginning! URL: www.it-finanzmagazin.de/die-apple-banking-plattform-kommt-apple- pay-was-just-the-start-20582/
9 Handelsblatt (2013). Welcome to the Google Bank! URL: www.handelsblatt.com/unternehmen/it-medien/ein-blick-in-die-zukunft- willkommen-bei-der-google-bank/8346312.html
10 Capital (2015). IT giants are shaking up the financial business. URL: www.capital.de/meinungen/tech-riesen-mischen-finanzbusiness-auf.html