Technology and finance are naturally linked. Digitization has made account keeping much easier. It's probably the most important underlying factor in the globalization of trade and commerce, making it possible for money to be instantly transferred between accounts anywhere in the world.
However, the American banking industry is still dominated by venerable institutions who've existed for decades - in some cases, centuries. That could all be about to change.
In other countries, challenger banks are emerging as a serious threat to traditional banking. While challenger banks are yet to make a real impact in the United States, there are growing signs that companies such as Amazon, Apple, Facebook and Google are considering entering the world of finance. If they do, these digital attackers could completely revolutionize the American banking system.
What are Challenger Banks?
When the aftershocks of the 2008 subprime mortgage crisis rippled across the Atlantic and hit Britain, it plunged the country into a decade of austerity measures that are still squeezing public services. Bankers have never enjoyed much popularity, but the fallout from the financial crisis brought their reputation to an all-time low.
Tech-savvy entrepreneurs seized this opportunity to take on the UK's big banks. Challenger banks such as Atom, Starling and Monzo have been growing rapidly over the past few years, attracting customers who have an inherent distrust of big banking.
With mobile banking via smartphones being the norm in the UK these days, challenger banks have differentiated themselves from their bigger and more established rivals by focusing firmly on convenience and tech integration. For example, Monzo automatically categorizes all payments, so customers can instantly see how much they spend each month on food, entertainment, clothing, etc.
While innovations like this are helpful, they're not exactly revolutionary. A much bigger change that challenger banks are trying to usher in is to become a marketplace for other banks' products and services. If you go into a bank looking for a mortgage or another type of loan, they will currently try to sign you up for one of their products. What challenger banks plan to do is to offer customers deals from across the whole marketplace so that they can always be guaranteed the best possible terms at the lowest possible price.
Challenger banks are really taking off in the UK, but the same isn't true for the United States. The main reason seems to be that American consumers feel less comfortable in entrusting their money to a start-up that lacks the track record of a big-name bank. This has created an opportunity that some major tech firms might be getting ready to exploit.
The banking industry relies heavily on trust. When customers deposit money, they fully believe they will be able to access it later. When financial crises happen, like in 2008, customers expect the government to step in and bail-out their bank before their savings disappear. A common phrase bandied about after the 2008 financial crisis was that America's big banks were "too big to fail." The same isn't true for start-ups and digital disruptors. However, companies such as Amazon, Apple, Facebook and Google all have huge resources and trusted brand names that could make them a serious competitor to the existing banking industry.
Millions of people have already entrusted vast amounts of personal data to these tech giants. With an enormous captive audience, moving into banking makes sense. These tech giants have already formed the Financial Innovation Now lobby group. Some, such as Pay Pal and Amazon, have recently been meeting with banking regulators directly.
There are barriers to becoming fully-fledged banks. Regulation in the United States has traditionally tried to keep commerce and finance separate. Walmart tried to launch their own banking group in 2005, but this attempt was blocked by unions and regulators.
Google and Apple have both struggled in vain to promote mobile payments via smartphones carrying their operating systems. While overseas tech firms such as We Chat in China and Kakoa Talk in South Korea have revolutionized their regions with integrated mobile payments, consumers in the United States have seemed less inclined to adopt this technology. Offering fully-fledged banking services could be one way for these firms to overcome consumer reticence.
Why Banks Should Be Worried
If any of the Silicon Valley tech giants launch a bank, the United States' financial services industry has good reason to be worried. This cuts deeper than just winning customers over by replacing disliked suit-wearing bankers with hip jeans-and-T-shirts computer programmers. A Silicon Valley tech giant can completely outclass any financial services firm when it comes to those firm's greatest strength: understanding human behavior.
Major tech companies know what their customers' interests are, who their friends are, where they work, where they go in their spare time - almost everything that makes a person who they are. This could allow them to tailor personal bank accounts in new ways that could be as revolutionary for personal finances as social media and the internet has been for personal relationships.
Personal banking is a difficult field to be profitable in. Major banks rely heavily on customer-facing AI, cloud computing and advanced analytics to give them a competitive edge within a very tough industry. The problem is that many banks are provided with these advanced tech services by the same tech firms they could soon be competing against.
Amazon is particularly strong in this area. Amazon Web Services provides essential technology to Aon, Capital One, Nasdaq, Pacific Life and dozens of others. American Express and Capital One both use Amazon's Alexa software to provide voice-activated digital assistance.
Tech in areas such as artificial intelligence and machine is still rudimentary compared to how it might look in a decade from now. Companies such as Amazon, Apple, Facebook and Google will be at the forefront of development in these areas, giving them an enormous competitive advantage over the existing financial services industry.
No major tech company has declared any intention to get involved in banking yet, but it's certainly an idea they seem to be exploring. If it's only a matter of time until we see Google Bank competing with Apple Banking and Facebook Finance, America's banking industry may be in for an enormous shock.
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