Big tech firms already control what people watch, buy and find online. Now, some of them are trying the waters of FinTech.
Collectively, they have many names. The Big Four. GAFAM. FAANG. All of them, clever acronyms to refer to the titans of the tech industry. Over the years, the likes of Google, Facebook, Amazon, Apple, Alibaba, Microsoft, Uber, and Netflix have grown into massive companies spearheading their individual segments of the tech industry.
Now, some of them are moving into FinTech. For instance, Apple has launched a credit card on top of its payment solutions, Uber has initiated a FinTech initiative named Uber Money and Facebook has introduced a payment solution as well as spearheading the cryptocurrency project Libra. Then, of course, you have Google Pay, Amazon Pay and Ant Financial.
In other words, the examples of tech titans going into the FinTech space are plentiful. For the businesses already in the industry, big tech companies’ entry into the sector presents both challenges and opportunities.
It’s hardly a secret why this is happening right now. While financial services firms have always used new innovations to get an edge, an argument can be made that the 2008 recession acted as a catalyst to propel the growth of the sector.
“The industry, through necessity and regulation, was forced to slim down and focus on core activities,” WealthTech100 company Kidbrooke argues in a recent blog. “This retreat offered up a fertile breeding ground for a new genre of FinTech firms to build into an era which was already being shaped by increased consumer digital uptake.”
In the last decade, the FinTech sector has matured to include everything from challenger banks like Revolut and PayTech firms like Klarna to transaction unicorns like TransferWise and cybersecurity ventures like Netskope.
Against this background, big tech taking an interest in the industry is easy to understand. “The increased interest of large tech companies in the FinTech space only serves to affirm the significance of the sector itself,” says Ellison Anne Williams, founder and CEO of Enveil, the cybersecurity company that has found itself on both the RegTech100 and CyberTech100 lists in the last year. “Big firms don’t focus on sectors where they don’t see longevity and the potential for significant growth.”
She argues that big firms have also recognised that “FinTech technologies need to be integrated and part of an organisation’s broader efforts, especially in cross-functional areas like compliance and security.”
“Many of the big players already have large footprints within financial service firms so they are the in a position to be leaders in terms of integration and consolidation,” Williams continues.
Even though the tech titans’ entry into the sector is easy to understand, it will nevertheless present FinTech startups with challenges.
Already, new ventures must raise capital and get customer traction for their services in order to have a chance. “Most smaller FinTechs unfortunately fail to climb or conquer this mountain, their innovation instead being gobbled up cheaply by the incumbents,” says Phil Smith, CEO of Embark Group, a digital investment savings and retirement solutions provider.
However, now they may also have to face competition from big tech. “[It’s a] second mountain to climb,” says Smith, adding that the tech titans “have the advantage of being able to step around this mountain and then to leverage multi-geographic distribution scale on their own, without the need for help.”
“Their well-tuned infrastructure for development, testing and deployment also means their ability to invest in R&D, to leverage grade A talent, and to deploy innovation at pace will make it almost impossible for small players to create their niche,” he warns. “Think Amazon – how many small startups do you see trying to compete in their space right now? The same will happen here in the FinTech world.”
Having already embraced big tech businesses’ other products, it also seems that consumers would be happy to do the same when it comes to their FinTech offerings. For instance, 74% of high networth individuals around the world would be happy to enlist big tech for their wealth management needs, according to a recent report by Capgemini.
“Traditional notions of industry boundaries are increasingly blurring and for the next generation of digital-native customers, it may not be so unnatural to consider wealth management services from big techs,” Elias Ghanem, global head of market intelligence and financial services at Capgemini, tells FinTech Global. “Customers today are more demanding for highly personalised and speedy services which they are receiving from big techs.”
Smith is surprised that companies like Google haven’t entered the “financial advice market aggressively” and used their big data analysis capabilities to easily “outcompete both small startups and incumbent financial services firms.”
“We have seen with Ant Financial in China how easily tech-rich consumer firms can move in and dominate both FinTech and its underlying propositions,” he adds.
That being said, Kidbrooke argues that big tech “should bear in mind that many FinTech firms now have teeth of their own” both in terms of their size and their innovative prowess, pointing at “innovators and disruptors like Mambu and Tink [who] are changing the landscape of retail financial services by plugging into paradigm change, like open banking.”
“The latter as an example, have so far proven to be reluctant to stand aside and allow ‘bigger boys’ to steal their lunch money,” Kidbrooke writes. “Despite this, one must conclude that FinTech remains fundamentally a blue ocean segment. Overall, it is still characterised by small and medium-sized firms continuing to innovate and create new products to meet both emerging and historic consumer problems.”
Moreover, most FinTechs’ nimbler size could also prove a strength. “Smaller companies recognise their advantage lies in agility,” Williams says. “The ability to adapt quickly to the changing technology and regulatory landscape allows small firms to be leaders in innovation, pushing the limits of what’s possible by rethinking the path to solution. They deliver many of the significant technologies advancements we’ve seen introduced in recent years by focusing on addressing one critical aspect of a challenge rather overcoming the barriers to achieve enterprise-wide solution.”
Moreover, far from every FinTech will have to go toe to toe with the big tech companies. Some might even benefit from the introduction of the new players, for instance through new partnerships and funding.
“They may enter the market more aggressively than they have done in the past, but it will mainly be in partnership with companies that are already in the FinTech market and understand the nuances involved around banking and financial services in the real world,” says Iain Chidgey, vice president EMEA at Sumo Logic, the machine data analytics unicorn.
There is also an argument to be made that big tech firms entering the sector will ultimately benefit consumers. “[The entry] of big tech will mean better reach to underbanked population as well as inexpensive services,” argues Ghanem. “Let’s not forget that big techs are known for the customer experience. The smaller firm segment, which has been less prioritised by the traditional players, will find a new banking partner in big techs. We already know Amazon is active in this space.”
At the end of the day, big firms entering a new industry is nothing new and just like with any other time in history, it will present smaller firms with both obstacles to overcome and opportunities. It is up to the smaller firms to ensure they know which is which and act on it.
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