August 13, 2020
Regulatory know-how, maturity and specialized services offer ways for financial sector incumbents to stave off — or collaborate with — Big Tech, according to members of Protocol's Braintrust.
Good afternoon! While tech giants have slowly been pushing further into the financial sector, we wanted to know how existing financial services players and fintechs were positioning themselves to push back. Members of the Braintrust told us a few areas of expertise that the incumbents have that'll be useful in the coming years, but also highlighted that there might be more 'coopetition' at play than pure competition. If you have any questions or comments for us, feel free to send us a note at firstname.lastname@example.org.
Partner at Homebrew
We're enthusiastic investors in financial technology startups, which service consumers (such as Chime), businesses (Gusto) and other financial technology companies (Plaid, Finix). At no time in making any of these commitments did we worry "what happens if Google or Apple or Facebook get into this line of business?" Why? Because we've tried to focus on areas where there's some combination of regulatory nuance, proprietary data sources, markets that appear to be smaller than they actually are because they're undiscovered or underserved or where trust is paramount and the customer doesn't want to be serviced by the same company that helps them share goofy photos with their friends.
The companies most in danger of disruption from big tech will have (a) non-proprietary customer acquisition channels, (b) high cost of capital or (c) temporary data advantages. Big tech has distribution, low cost of capital and often more data on consumers and businesses than 99.9% of other companies. So, for example, I wouldn't want to be a generic SMB lending business competing with Square Capital, Shopify Capital, Amazon Lending and such, as they continue their rollouts.
President, Operations and Technology at Mastercard
It's a critical time to be innovating in the fintech space. In the last six months alone, we've seen a record acceleration of digital payments. And that means there's opportunity for all players — new and experienced, big and small. The idea that it's Big Tech versus the incumbents is a false dichotomy. In reality, there's a lot more partnership and "coopetition" than many people realize. That's because in any highly regulated industry, deep domain expertise is paramount. So, consumer tech companies are teaming up with financial technology experts.
Unlike many subscription- or advertising-based tech companies, Mastercard runs critical payments infrastructure, which must be always-on, completely secure, globally available and extraordinarily fast. So, for example, Mastercard's push payment capabilities enable consumers to move money instantly, powering services like WhatsApp and Square Cash. Our tokenization service (MDES) enables any connected device — from mobile phones to wearables — to be used for commerce, with consumer applications like Apple Pay. The open banking revolution — where app developers can leverage financial data through APIs — is another example of co-creation that is reshaping the industry.
Long-standing financial tech companies like ours offer a unique value proposition: a deep understanding of regulation and the complexity of the financial ecosystem, resilient tech infrastructure across the globe, as well as a deep commitment and skill in ensuring security and privacy. I don't know any other industry where trust and security is more important.
Founder at Burnmark
It's a tricky one, because Big Tech will form a very hefty competition for fintechs and financial services companies as they have numerous advantages over the current players including better scale of customers, faster/cheaper customer acquisition and the availability of customer data. They may have an advantage in all customer-facing aspects of the value chain.
There are three areas, I believe, are advantageous to the current financial services players.
- Trust: We have seen in some of our research that trust for financial services is highest with traditional financial services players, followed by fintechs. There is a higher threshold of trust desired by consumers for handling aspects of personal finance, and this is quite favorable for the current players over Big Tech.
- Regulatory know-how: Traditional financial services players and fintechs, to an extent, have in-depth knowledge of regulatory, AML, KYC and reporting structures. Several of these players work closely with the supervisors themselves, helping find the balance between regulation and innovation for new areas of financial services. This is a huge advantage that has come through years of competency building, which may take quite a large amount of resources at Big Tech to replicate.
- Innovation as a core competency: Fintechs are built on the premise of customer experience and innovation in financial services (in products, processes and delivery). That's their core competency. Until this is the primary focus and core competency of Google, Amazon and Facebook in financial services, fintechs have a huge advantage in delivering innovation through financial services.
CEO at Dave
As big tech companies continue to re-create the customer experience in every industry, from entertainment to health care, it's not surprising that we're seeing tech expand into banking. Banks are integral to the daily functioning of nearly every person's life, yet unlike tech companies, traditional banks have not historically focused on continually improving the experience of their customers. One aspect of the customer banking relationship that tech companies are likely hoping to tap into is its stickiness. No one wakes up in the morning excited to switch banking account services, making it an incredibly attractive industry to expand into, but also one that's difficult to break into.
Established fintechs have a huge advantage in that they are built primarily around a true understanding of the burning consumer pain points that customers face when it comes to managing their money. These pain points, like the annoyance of maintaining a budget or needing to borrow money from a friend to pay a bill, are often created by bank accounts (even tech-forward ones) — not solved by them.
The companies that have already built a financial relationship with millions of customers by improving their financial well-being are well positioned to earn an enduring place in customers' hearts and (digital) wallets that can't be replaced by Big Tech.
Chief Analytics Officer at FICO
Maturity. Financial institutions, in particular, have the advantage of having worked in regulated environments that require all participants to follow the same rules. As a result, financial institutions have established many processes to serve customers effectively, in areas including ethics, and in the proper governance and testing of the analytics and AI models that banks use to make decisions that affect customers.
Tech's "Big Four" aren't meaningfully regulated today. Instead, these companies often operate as extensions of their founders, with the end appearing to justify the means. In the banking world, the means are more important than the ends. Financial institutions collaborate to ensure that the means are defined, ethical and monitored, because customers demand, and deserve, answers if an AI model turns them down for a loan or a credit card.
The reality is, regulation doesn't stifle innovation. It allows innovation to flourish. Customers benefit when the very best candidates emerge from a large pool of ideas — but those ideas must conform with rules that everyone is required to follow. Fintechs have thrived in exactly this way.
The proliferation of person-to-person payment options is a perfect example. Venmo and Square were once fintech upstarts, providing innovative new ways to ride the rails of the payment system established and maintained by — surprise! — large financial institutions.
U.S. bank regulation began with the National Bank Act of 1863. As a result, financial institutions long ago figured out how to work cooperatively to solve problems. Big Tech has a lot to learn from financial institutions and fintechs as to how to responsibly make impactful decisions about lending, financial crime and lifecycle management. On its own, technology doesn't serve customers' best interests; process, collaboration and standards, applied within an appropriate regulatory framework, do.
SEVP and Chief Information Officer at Global Payments
When it comes to the increasingly close interplay between technology and financial services sectors, we should focus on collaboration versus competition, with financial institutions and their customers reaping the rewards. Because, when the power of Big Tech's platforms are incorporated into financial systems and services, innovation abounds. For example, the growing ubiquity of digital payments in the U.S. is paving the way for more technology companies to partner with financial service companies.
At Global Payments, we recently announced a multi-year collaboration with Amazon Web Services to create a leading, cloud-based issuer processing platform for financial institutions around the world regardless of size, location or processing preference. By leveraging Amazon's unmatched global infrastructure, we can help level the playing field by bringing leading edge technologies, such as open banking and contactless commerce, to large financial institutions that were previously only available to startups and new market entrants.
Big Tech companies do not want to become banks, nor do they have deep expertise to become full-service fintech players. These types of powerful partnerships and innovative collaborations help open doors for Big Tech to increase focus on financial services by partnering with companies, such as Global Payments, who have expertise and worldwide distribution to make more products and solutions easily available and consumable for new and existing customers.
And everyone who participates in global commerce — from banks to businesses to consumers — will reap the benefits in more reliable, secure and customized financial services and solutions.
See who's who in Protocol's Braintrust (updated Aug. 13, 2020).
Questions, comments or suggestions? Email email@example.com
Kevin McAllister ( @k__mcallister) is a Research Editor at Protocol, leading the development of Braintrust. Prior to joining the team, he was a rankings data reporter at The Wall Street Journal, where he oversaw structured data projects for the Journal's strategy team.
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