Is Banking the Only Sector that Big Tech Cannot reach?
Facebook’s Mark Zuckerberg & US President Barack Obama.
Big techs and the financial sector are not in a perfect duality. Indeed, there are many companies in the financial sector, such as Black Rock, which rely on advanced technologies but are financial juggernauts. Banks, to be more and more efficient, extend their information collection capacity by integrating into their operations new technologies that are usually developed by Big Techs. Therefore, in this essay, companies in the financial sector will become treated like traditional banks. Taking into account only the aspect of financial services detached from new technological integrations. The bias of collaboration between banks and technology companies will become discarded to better understand the problem of the entry of Big Techs into the financial services sector.
This will also allow a better opposition between banks and Big Techs and a characterization of the comparative advantages of each: traditional banks are the pioneers of financial services and comply with regulations, while Big Techs have new high-performance technologies that will allow an optimal use of banking data.
The conquest of financial services by Big Techs
Apple Card, Google Bank and Facebook Pay have probably scared financial services companies. American and Asian Big Techs base their success on large-scale data collection, the network effect and the management of increasingly diversified branches of activity. These companies are no longer limited to social media, e-commerce, or
search engines and nothing seems too big for them. They now want to turn to financial services. This conquest gives them a better knowledge of their users (thanks to payment data) and ultimately the creation of new revenue. Big Techs seem legitimate in the financial services sector given their millions (or even billions) of recurring users worldwide and their mastery of technologies relating to dematerialization. Thus, a payment system developed by a Big Tech would see no problem of profitability in that users are already present and are increasingly demanding strong connectivity between services.
For example, Apple plays on the fact that every daily action is managed by their services in order to make life easier for users. This strategy involves constraints of non-adaptability between services of different brands and pushes users to get used to and request a single tool or system for all the actions they perform. With this in mind, it even seems logical that Apple would create Apple Pay because the iPhone made it possible to do almost everything nowadays, except pay…
The “danger” of the conquest of financial services by Big Techs
But then what would be the concrete dangers of such a rise by Big Techs? It is worth mentioning the three main consequences that would be harmful for the financial services sector.
Firstly, the intrusion of Big Techs into the financial service risks upsetting the economic order. These companies have lower costs than traditional banks because all their services are dematerialized and their customer base is already large and loyal to some. In addition, given the size of Big Tech groups, considerable economies of scale could be achieved and help lower the prices of financial services. Considering the diversity of their activities, their income is not based solely on financial services, which will allow them to offer prices even lower than those charged by banks. Ultimately, banks can only become ousted by the arrival of Big Techs.
Secondly, banks find themselves regulated to ensure the security of placements and investments. Moreover, to guarantee transparency as well as the traceability of operations and to standardize standards in all countries. “If the banking sector plays a central role in the economy, this is based on the solidity of the institutions that make it up and on the confidence they inspire” states a report produced in 2006 under the aegis of the Financial Sector Advisory Committee.
In France, for example, the supervision of banks by the Autorité des Marchés Financiers (AMF) and the Autorité de Contrôle Prudentiel (ACP) is based on rigorous regulations backed by banking and financial law. This right applies by definition to financial companies – who only have finance as their main object in their companies’ statutes- and professional credit institutions!
The transition of the financial services sector towards new technology companies raises important legal and practical questions regarding regulation of these companies and their compliance with French law. This question obviously applies in all countries according to their national laws and specifically in European countries which are subject to dual financial regulations (national and European).
Finally, beyond the practical arguments, some argue that it simply would be “dangerous” to let Big Techs have access to the financial services sector considering that they are the companies with the largest amount of personal data in the world. Indeed, the collection of data associated with an optimal exploitation of the latter thanks to advanced algorithms gives an undeniable power to Big Techs in the improvement of their services and their targeting of customers. This faculty associated with access to financial services or even with the management of certain financial services represents a significant concentration of powers. However, the concentration of powers is never beneficial and inevitably leads to a kind of anarchy. Whether commercial, social or political because important decisions will never become called into question.
A relativized rise of Big Techs ?
In truth, Big Tech doesn’t seem to be “storming” financial services for several reasons. The Big Techs do not want to go directly into the financial services sector because of the significant regulatory part and the technocracy of the banks.
Banking transaction technologies are very old and expensive: the programming language used is Cobol and no one codes in this language anymore, which makes it a program that is not very accessible but also very secure. Indeed, even hackers no longer code in Cobol. As a result, Big Tech is at an impasse, they have no engineer or resources adaptable to Cobol. They hesitate to take a step towards an obsolete complementary information system in addition to having all the regulations to manage.
Crypto-currencies: false gateway for Big Techs in the financial sector
As a result, the only ways for Big Tech to get into financial services were through Web 3.0 and Blockchain and cryptocurrency technologies.
The only Big Tech company to make a bold move was Facebook with its failed Libra cryptocurrency. This cryptocurrency was a failure because it became massively decried by the crypto community. Indeed, this community based in fact on anti-system ideals does not want a large group to hold a cryptocurrency to make it a reference currency. Whether it is a bank or a Big Tech. Precisely, the creators of the blockchain wish to liberalize financial exchanges as much as possible to prevent any monopoly and/or regulation. It would therefore seem that crypto-currencies are not a channel for Big Tech. Given the very principle of this technology which aims to remove any intermediary between individuals in their financial transactions.
Online banking as the final battle arena?
The competition actually lies in retail banking, i.e. towards individuals, and not in the business and investment banking sector. Big Techs want to enter the personal finance sector at all costs because their data collected is that of individuals and not of companies.
It turns out that traditional banks, to counter the innovations of some startups in the retail banking sector, have already taken over online banks. However, if Big Techs continue their growth in the financial sector and take market share in retail banking, their extension will also take place in online banking. The final confrontation will therefore take place in the online banking sector, which will be both Big Techs’ means of action and the only possible response from traditional banks.
Finally, it is worth asking whether this dazzling growth of Big Techs will continue with a possible extension to other markets – formerly reserved for financial institutions – such as business and investment banking. Only time will tell, but it is certain that the high level of regulation and regulation of this type of market will undoubtedly slow down the deployment of Big Techs.
Camilla Rida – University Paris 1 Panthéon Sorbonne