Big Tech vs Big Banks – Two Giants Meet

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Technology has changed the way banks operate. This is especially the case now as mobile and digital banking become more attractive in the wake of the COVID-19 coronavirus outbreak. But are global banks capable of leveraging the opportunities – on their own, or will the sector be further transformed by the technological newbies?

"Payment processing is data-rich, which fits perfectly with the technology companies’ business model."

- Jon Arfstrom

As the technology arms race escalates in the banking sector, could alliances with Big Tech give U.S. banks a competitive edge in exploiting their abundant reserves of customer data?

It’s a critical question as mobile banking trends accelerate, with the COVID-19 coronavirus pandemic giving added impetus as bank branches close and the population enters lockdown. Indeed, the top five U.S. banks, led by JPMorgan Chase and Bank of America, spend $35 billion annually on financial technology.

While there is a compelling business case to be made for this strategy, banking could prove to be the sector that disrupts Big Tech’s proven business model of disrupting other industries, despite their unrivaled expertise in leveraging Artificial Intelligence and Big Data.

Regulatory restrictions

A so-called Bank of Google has undeniable attractions for the tech giants. Still, it could be a less inviting proposition for the banking incumbents, given that 65% of profits currently lie in origination and sales. Partnering with tech giants could risk the incumbents becoming low-margin utilities.

However, this remains a moot point as the barriers to entry for Big Tech are currently regulatory rather than commercial or technological. If a Big Tech company wants to take deposits and make loans, the essence of what a bank does, then they would have to apply for a banking license and submit to regulation by the Federal Reserve or the controller of the currency. Despite the Fed’s decision to apply a lighter regulatory touch in banking during the downturn caused by COVID-19, this will not make entry to the market any easier.

While becoming a bank-regulated holding company allows Big Tech entry into financial services, it could exert significant downward pressure on their stock valuations since the best banks trade at multiples in the region of 14 to 15 times forward earnings. Unless that regulatory moat is filled in, which we do not envision, then core banking products will remain effectively off-limits to Big Tech.

Payment data

However, opportunities in the payments processing area could be exploited by Big Tech since a banking license is technically not required. Payment processing is data-rich, which fits perfectly with the technology companies’ business models. They want the data, particularly on consumer finance, rather than commercial lending. They want to see what's happening to consumers, what are they buying every week? Once they can gather that data, they can then sell it to third parties.

There is a divergence in the perception of risk to the consumer from the potential participation of Big Tech in payments processing and data collection. Some, including the government and consumer protection agencies, are concerned that Big Tech could use personal payments data to push individuals towards borrowing more and becoming over-indebted. However, the consumers that already use social media and search applications like Facebook and Google appear unconcerned about such data use and do not feel hurt or exploited.

Payments offer Big Tech the biggest opportunity in the lucrative banking sector, but it’s by no means a done deal. Banks will continue to invest in both back-office and customer-facing technology to optimize profitability and improve margins in the face of the predicted negative real GDP growth stemming from the COVID-19 coronavirus impact on the economy.

Published April 20, 2020

RBC Financials Equity Team

Beyond 2020Technology

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