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POINT OF VIEW Big Banks, Bigger Tech: Adapting Business Models April 2019 parker-fitzgerald.com
2
Foreword
The banking sector is no stranger to innovation. Over the past ten years the
capacity to disrupt banking business models has grown beyond all recognition
fuelled by the emergence of AI, data analytics, Cloud banking and the blockchain.
Nobody has done more to disrupt the traditional banking models than the banks
themselves, who last year spent $261bn globally on digital investments.
Whilst much of this spend has traditionally been targeted at hygiene factors,
cleaning up legacy IT estates and protecting customer data from the increasing
threat of cyber attacks, future investment priorities will need to evolve if the
incumbent banks are to maintain their existing client books. That is not to
downplay the ongoing importance of good hygiene; banks will continue to evolve
their IT platforms to improve operational efficiencies and they will need to increase
investment in protecting against cyber risks. But banks will also need to prepare
for a shift in how the sector drives innovation, and more importantly, who is
potentially driving it.
To date, innovation has been spurred on by a diverse and energetic FinTech
sector in which new ideas and processes are easily accessed by incumbent banks
working collaboratively with the FinTech sector. This model will continue, but we
could be about to witness a rapid evolution.
It is already the case that two of the biggest home-grown financial services
companies in China are large tech companies. In the US, the ‘BigTech’ companies
like Amazon are also starting to follow suit. Given their increasingly global
footprint, these BigTech firms possess the distribution firepower to disrupt retail
banking models well beyond their domestic market.
In safeguarding businesses against such an existential challenge, the incumbent
banks are faced with what could prove to be a narrow window of opportunity to
respond. This will mean placing the customer experience at the heart of future
digital investment. Truly extending the benefits of the digital revolution means
that new products and services offering more choice, flexibility and convenience,
combined with lower and more transparent pricing, will become the hallmarks of
tomorrow’s banking market. Banks have no time to waste in making this a reality.
Scott Vincent
CEO, Parker Fitzgerald
Iain Anderson
Executive Chairman, Cicero Group
Non Executive Director, Innovate Finance
3
executive summary
A decade on from the Global Financial Crisis (GFC), the financial sector is
finally moving out of the shadows and coming to terms with the period of digital
transformation that lies ahead.
To date, leading banks have successfully unlocked efficiency gains through
simplifying processes and digitising repetitive tasks; their ability to grow top
line through digital means, however, remains a perennial challenge. Despite its
promises, the quest to growth seems harder in the age of digital finance than along
the well-trodden paths of the past.
In a recent report by the Financial Stability Board (FSB), the global regulator
issued a dire warning to the industry in this new paradigm: while FinTechs still
operate at the fringe of banking, the BigTech firms – such as Amazon and Google
– are starting to pose an existential challenge to incumbent banks.1
Indeed, the scale and scope advantages of traditional banks can often be
outshone by the tech giants’ capacity to invest and their appetite to acquire.
Proprietary customer insights enjoyed by banks are being sidestepped by
ubiquitous data collection and superior analytical ability. Meanwhile, regulatory
drives, such as the second Payment Services Directive (PSD2) and Open
Banking, are giving the tech sector a helping hand in entering financial services.
Already the tech titans have made strides in payments, asset management, and
insurance. The more formidable players, such as Amazon, are also beginning to
offer core banking products (business loans and current accounts, for example) to
select audiences.
This foray onto banks’ turf should make incumbents stand to attention. If the
origination and distribution of financial products shift from big banks to tech firms,
so too could nearly two-thirds of current banking profits.2 The FSB is not alarmist
in its warning that banks may take on greater risks to recapture lost ground.
The financial industry must therefore focus on its ‘disruption-proof’ core: customer
experience, institutional trust, and regulatory excellence.
Customer stickiness with incumbent players remains high: the dawn of Open
Banking has yet to sway masses into changing their banking provider. Banks have
a short window of opportunity to truly upgrade the customer experience for the
digital age. This is already firmly on banks’ agenda, with their digital investment
globally expected to grow four percent per year to reach $300 billion by 2021. But
how banks spend that investment must evolve.
Much of banks’ digital investment to date has focussed on migrating and
consolidating existing IT systems to address legacy issues. The nature of
consumer-facing banking services has not meaningfully evolved.
1
Financial Stability Board, FinTech and Market Structure in Financial Services: Market Developments and Potential Financial
Stability Implications, 14 February 2019.
2
American Banker, The Tech Giants are Coming for Your Customers. Be Ready. 4 January 2018.
4
The next phase of digital investment will need to focus on driving genuine
innovation that reshapes the customer experience, or else banks risk losing
business as clients hunt for a slicker operation.
Preserving institutional trust in the age of digital finance will also be key. While
banks are still recovering a decade on from the GFC, tech giants are starting to
feel the pinch from changing public opinion. The trend of celebrating all things
Silicon Valley has given way to a growing array of concerns, from data privacy to
anti-trust and ‘fake news’.
Avoiding damage is fundamental to preserving trust. But as UK financial firms saw a
five-fold increase in the number of data breaches in 2018, this is by no means a given.3
Financial institutions face an increasingly complex threat landscape and risks
associated with their own digital innovations. This calls for operational resilience to
be viewed as no less important than financial resilience.
Regulatory excellence in digital finance is the final piece of the puzzle. Financial
regulators are playing catch-up in evolving supervisory and conduct rules to
accommodate new technology providers. This has been essential to open up the
market for the arrival of start-up FinTechs, but the pendulum may need to shift
to focussing on regulatory parity if the tech giants make a meaningful play for
banking market share.
Banks still have the track record of enabling consumers, businesses and
economies to grow on their side – but only for the time being.
To move on from turnaround to transformation, banks must now use digital
investment to enable customers to bank in a way that tech firms will no doubt be
itching to do themselves.
3
Financial Times, Cyber Attacks on Financial Services Sector Rise Fivefold in 2018, 25 February 2019.
5
From FinTech To TechFin
The adoption of new technology has been integral in the reshaping of banks’
business and operating models. Over the past several years, technological
innovation has emanated from within the Financial Technology (FinTech) segment,
typically composed of smaller firms offering specialist products to financial
institutions, ranging from back-office fixes to front-end applications for clients.
The FinTech sector has grown rapidly but remains largely at the periphery of
core banking activities. According to a Basel Committee study of the FinTech
landscape, a significant proportion of concentration is found in areas of payment
and settlement, aimed at retail banking customers.4 FinTech’s impact on incumbent
banks remains marginal when it comes to credit and deposit services, wholesale
banking, and capital market activities (see Figure 1).
Figure 1: The FinTech landscape:
significant products concentrated in payments and settlement
SECTORAL INNOVATIONS
Credit, deposit Investment
Payments, clearing and
& capital-raising management
settlement services
services services
41%
18% 9%
RETAIL WHOLESALE
Crowdfunding Mobile Value transfer High-frequency
Lending wallets networks trading
marketplaces P2P transfers FX wholesale Copy-trading
Mobile banks Digital Digital exchange E-trading
Credit scoring currencies platforms Robo-advice
Portal and data aggregators
Ecosystems (infrastructure, open source, APIs)
Data applications (big data analysis, machine learning, predictive modelling)
Market Distributed ledger technology (blockchain, smart contracts)
Support
Services Security (customer identification and authentication)
27%
Cloud computing
Internet of things / mobile technology
Artificial intelligence (bots, automation in finance, algorithms)
Source: Basel Committee on Banking Supervision, 2018.
%: share of significant FinTech products according to the Basel Committee survey.
4
Basel Committee on Banking Supervision, February 2018, Sound Practices: Implications of FinTech Development for Banks & Bank Supervisors, p9.
6
Without the capital or customer base of banks, FinTechs looking to move beyond
product provision for banks (and perhaps establish their own brand among clients)
have often taken collaboration with incumbents as the main route to getting their
innovations to market.
In contrast, the emerging TechFin cohort – financial services offered by big
technology (BigTech) firms, such as Google and Amazon, as part of a broader
ecosystem – is posing a very different competitive dynamic to incumbent banks.
In part, TechFin has grown on the back of the banking sector’s struggle over
recent years. The story for many banks since the GFC has been one of ‘managed
decline’. Regulators have sought to raise conduct and prudential standards across
the board, while simultaneously implementing tougher stress tests and new
resolution mechanisms to deal with future crisis scenarios.
A decade of prudential tightening has taken its toll. High capital thresholds and
heavy compliance and litigation costs weighed on banks’ profitability. At the same
time, historically low interest rates hampered the margins of loans in recent years,
while spells of low volatility and weak equities markets undermined trading incomes.
To cope with this challenging landscape, many banks have focussed their digital
spending on system rationalisation and process automation to drive operational
efficiency. However, ‘cutting to grow’ has its limitations: without new avenues to
revenue, muted profitability and investment confidence continue to challenge
the financial sector. Despite improved performance, financial institutions remain
‘cheap’ in financial markets.
In contrast, BigTech firms have remained the darlings of investors, harnessing the
value of their vast customer base, data advantages, and proprietary technologies.
Their enviable cash position and price multiples have enabled them to quickly
gain footprint across adjacent markets – financial services included. Like smaller
FinTech players, BigTech firms often start with payments and in less-contested
financial markets in emerging economies. From here, they can quickly gain inroad
into core areas of financial services including credit provision, insurance, savings
and investment products.
BigTech firms have the potential to pose existential challenges to incumbent banks.
The scale and scope advantages of traditional banks can often be outshone by the
tech giants’ capacity to invest and their appetite to acquire. Proprietary customer
insights enjoyed by banks are being sidestepped by ubiquitous data collection and
superior analytical ability. Meanwhile, regulatory drives, such as PSD2 and Open
Banking, are giving the tech sector a helping hand in entering financial services.
7
BigTech’s Banking Foray
What BigTech firms have already achieved in China may shed light on the future of
such firms in financial services globally. The FSB’s review of the TechFin market
shows that Chinese tech giants have both entered and gained significant market
shares across all segments of the financial sector. Alibaba and Tencent, for
example, occupy 94 percent of the China’s payments market.5 In addition, Alibaba
currently runs the world’s largest Money Market Fund (MMF), borne from its
e-commerce business (see Figure 2).
Figure 2: Building market dominance in a decade:
Alibaba’s rapid rise in financial services
2004 2010 2012
AliPay founded China Central Bank issues Ant Fund Sales
by the Alibaba licence regulations for third obtains licence
Group party payment providers to seek funds
Yu’e Bao reported AliPay had Launches financial
to have 600m users. 54.26% market product platform
AliPay has 870m users share in China Yu’e Bao
2018 2017 2013
Even in more heavily regulated and mature markets in the West, the likes of
Amazon were able to gain a formidable market presence. Our stocktake of
Amazon’s activities in financial services points to a decisive rise in customer
acquisition since 2017 and a proliferation of activities from payments and digital
wallet to business loans, insurance and current accounts (see Figure 4).
This rapid rise was undoubtedly helped by Amazon’s vast customer base, cash
strength, and access to forefront technologies including artificial intelligence (AI)
and machine learning. Amazon is by no means alone among BigTechs itching to
gain a foothold in financial services; similar initiatives can be observed across
other tech giants including Google, Facebook and Apple (see Figure 3).
The segue by BigTech firms into financial services could be further accelerated
by seismic shifts in both financial and technology industries. Within banking, for
example, many firms have indicated a pivot towards wealth management as a
growth driver. As banks shift their gaze to more personal client-bases, providing
top-level customer experience for an audience used to slick and customisable
services will form the industry’s next competitive front – and one that plays into
the hands of BigTechs, whose large customer bases generate massive volumes of
data about consumer lifestyles, spending habits and financial planning behaviours.
5
Financial Stability Board, FinTech and Market Structure in Financial Services, 14 February 2019.
8At the same time, the increased regulatory scrutiny faced by BigTechs within their
core technology business may well accelerate their advance into adjacent, heavily-
regulated sectors. Complying with complex global regulations will help technology
firms develop critical control, as well as regulatory and compliance capabilities
across jurisdictions – reducing one of the major barriers-to-entry for non-financial
firms considering a move into the world of financial services.
Should banks have to ardently pursue profitability after having their market share
impeded, the impact of BigTech will be felt not just at a micro base (i.e. how firms
react to the threat) but at a macro, systemic level. The FSB has highlighted the
associated risk to financial stability either through muted business performance
of global banks, or credit risks to the financial system should banks take drastic
measures to remain in the black.
Figure 3: BigTech’s foothold in financial services
AliPay (largest mobile payments Tempay (#2 mobile payments
PAYMENTS Baidu Wallet – co‑op with PayPal
platform in China) platform in China)
LENDING &
MYBank (SME lending for rural Baixin Bank (financial products
SHORT‑TERM WeBank (personal micro-loans)
areas and online merchants) and small loans)
CREDIT
CURRENT
Offered through MYBank Offered through WeBank Offered through Baixin Bank
ACCOUNTS
ASSET
Yu’e Bao (world’s largest MMF) License to offer Mutual Funds N/A
MANAGEMENT
60% stake in Cathay Insurance
Online insurance service in life Joint venture with Allianz and
INSURANCE China; founding stake in Zhong An
and property insurance Hillhouse Capital announced
Insurance
Google Pay – layers over Amazon Pay – layers over Messenger Pay – layers Apple Pay – layers over
PAYMENTS
existing card network existing card network over existing card network existing card network
LENDING &
Collaboration with Temporary financing in Pilot in collaboration
SHORT‑TERM N/A
Lending Club Amazon Lending with ClearBank
CREDIT
CURRENT Reports of talks with
N/A N/A N/A
ACCOUNTS banks
ASSET
N/A N/A N/A N/A
MANAGEMENT
Partnership with
Insurance on Google Co-op with Allianz
JPMorgan Chase and
INSURANCE Compare (no longer N/A on cyber insurance
Berkshire Hathaway on
operating) discounts
health insurance
Source: Financial Stability Board, 2019.
9Figure 4: Amazon’s foray into financial services
EMERGING
PAYMENTS LENDING INSURANCE
MARKETS
Begins patenting methods
for linking bank account
2004/5
information and for
pre‑paid cards
“Pay with Amazon”
2007 launched
Acquires “TextPayMe”
“TextPayMe” re-launched “Amazon Lending”
2011
as “Amazon Webpay” launches
“Amazon Local Register”
2014 India – brings payments
“Amazon Webpay” closes launches – card reader
to market in October
for SMEs
“Amazon Local Register”
Granted patent for closes
2015 image analysis for user Launch of Amazon Prime
authentication Store Card – partnered
with Synchrony Bank
Launches “Amazon Protect” India – acquires
“Amazon Pay” reported in the UK – accidental and “Emvantage Payments”
2016
to have 33m customers theft insurance for – quickly integrated into
consumer goods “Amazon Pay”
“Amazon Cash” launched
“Amazon Lending” has
“Alexa Fund” participates issued $3bn across
in funding Greenlight 20,000 businesses in the
Financial – alternative US, Japan & UK Mexico – launch of
debit card aimed at young “Amazon Prime”,
2017 “Amazon Lending”
consumers “Amazon Cash” and
originates $1bn in US
“Amazon Cash”
Launches “Amazon business loans
debit cards
Reload” – a reloadable
Launches “Amazon Prime
digital debit card for Prime
Rewards Visa Signature
members that links to
Card” – with Visa
consumer accounts
Launches “Doorstep” – a
cash pickup service in
Partners with Coinstar to India allowing customers
allow customers to deposit Extends 5% cashback Leads a $12m investment to load money into their
change at kiosks and cash reward for purchases into Acko – a car and “Amazon Pay” digital wallet
out digitally on cash app on Prime Rewards Visa bike insurance specialist
Card to purchase at focusing on “Internet Mexico – launches
Greenlight Financial hits Whole Foods Economy” deals debit card with Grupo
100,000 customers Financiero Banorte
2018 CNBC reports “Amazon “Amazon Protect’s”
News leak that Amazon is Lending” has partnered underwriter, the Warranty Expands “Amazon Pay” in
in talks with banks with BoAML to issue Group, is purchased by India into offline commerce
including JP Morgan loans ranging between Assurant – making it
and Capital One to build $1,000 and $750,000 easier to expand into Launches new lending
a product similar to a new markets experiment in India as a
checking account marketplace for lenders
and sellers to obtain a
competitive loan
10Developing banks’
Disruption‑Proof Core
The changing powerplay between BigTechs and Big Banks warrants close attention.
There is far more to this story than profitable segments of the banking value chain
being chipped away. If the origination and distribution of financial products shifts
from big banks to tech firms, so too could nearly two-thirds of current banking
profits. The FSB is not alarmist in its warning that banks may take on greater risks
to recapture lost ground.
The financial industry must therefore focus on developing its ‘disruption-proof’
core based on what it does best: customer experience, institutional trust, and
regulatory excellence.
Customer Experience
Customer stickiness with incumbent players remains high: the dawn of Open
Banking has yet to sway masses of consumers into changing their banking
provider. This gives banks a short window of opportunity to meaningfully upgrade
customer experience for the digital age.
Banks’ global digital investment is expected to grow over four percent each year to
reach $300 billion by 2021. But how they spend that investment needs to evolve.
Figure 5: Digital investment in banking: 2018–2021
$ bn
4.2%
300
annual growth
$114.9 bn
North America
250 $296.5 $84.7 bn
$284.5 Europe
$272.6
$261.1
$75.1 bn
Asia-Pacific
$21.8 bn
200 Latin America
2018 2019 2020 2021
Source: Celent report, 2018.
11Much of the digital investment by banks to date has focussed on updating and
consolidating existing bank IT systems, concerned with addressing legacy issues
and taking care of hygiene. This has been necessary in migrating banks from
analogue to digital, but the often fragmented approach to doing so has led to the
creation of siloed data, frustrating banks’ efforts to improve customer service and
manage risks more effectively.
The nature of consumer-facing banking services has not meaningfully evolved
during this time. To foster genuine innovations that reshape customer experience,
focus needs to fall on gaining a granular and joined-up view of customer data
banks hold to enable an integrated approach to serving customers’ financial
needs, wants, activities, and decisions.
Increased focus on data and services integration should also allow banks to better
maximise the benefits of enabling technologies, such as application programming
interfaces (APIs) and AI. Arguably, data silos may be the reason why some banks
have been slow to develop their propositions with APIs – a technology that enables
customers to manage all their financial activities in one place. Similarly, this could
explain why some banks have fallen behind investment firms and challenger
platforms in introducing other digital services, such as robo‑advice models to help
customers manage their personal finance more easily. The same holds true for AI,
whose very power of anticipating and optimising customer experience hinges upon
rich and granular data.
Leading banks have reiterated their continued commitment to digital investment.
Lloyds Banking Group (LBG), for example, tripled technology investment from
£1 billion during 2014–17 to £3 billion for 2018–21.6 At the same time, UBS and
JP Morgan have consistently allocated around ten percent of revenues to technology
in recent years, with JP Morgan’s digital investment exceeding $10 billion in 2018.7
A review of banks’ latest strategic outlook also uncovers a notable shift in digital
investment focus. Leading banks are moving on from simplifying processes to
aggregating systems, from improving customer interfacing to upgrading digital
infrastructure, and from driving efficiency gains to enhancing decision-making
capabilities. LBG’s 2018 annual report indicated that 34 percent of the bank’s
digital investment will be focused on creating new capabilities, particularly around
the use of API and machine learning, compared with 19 percent just a year ago.
6
Lloyds Banking Group 2018 Annual Report.
7
UBS and JP Morgan Annual Reports.
12Institutional Trust
BigTech firms, helped by their scope and scale, are expected to make a
fundamental impact on the financial industry. While we are starting to see signs of
this, the changing tide of consumer (and political) support for BigTech firms mean
that their inroad into banking may not be straightforward.
BigTech firms have found themselves at the receiving end of criticism – and in
some cases, lawsuits – at the hands of European governments. The past trend
of celebrating all things technological has now given way to a growing list of
concerns, from data privacy to anti-trust and ‘fake news’.
As consumers become warier of the volumes of personal data held by BigTech
firms – and the potential for misusing that data – we may see a reluctance to share
banking data or other aspects of personal finances.
Banks know all too well the importance of lasting perception. They may have
suffered a reputational hit in the wake of the financial crisis, yet even as a raft
of ‘different’ challenger banks have emerged, there has yet to be a wholesale
migration of main current accounts over to these players. The institutional trust
that traditional banks have long held is invaluable, and will be a critical weapon in
their defence against a future onslaught of the BigTechs eyeing their market share.
It is essential that banks hold on to this – avoiding damage is fundamental to
preserving trust. But as UK financial firms saw a five-fold increase in the number of
data breaches in 2018, this is by no means a given.
No industry is immune to cyber attacks, but financial services are in the firing line
as cyber criminals seek high-value targets, such as banks, while state-sponsored
activities are now adding to the growing array of cyber threats. At the same time,
supply chains in financial services are outgrowing firms’ and regulators’ oversight,
introducing substantial cyber risks through third- and fourth-parties.
Regulatory scrutiny on cybersecurity has been ramping up in recent years: 41
of the financial industry’s 56 cyber-related supervisory documents have been
introduced since 2016.8 A further 72 percent of G20 jurisdictions have reported
plans to issue new regulations, guidance or supervisory practices that address
cybersecurity in the financial sector in 2018.9
Intensified prudential scrutiny – and potential capital charges – over cyber
resilience is not inconceivable as financial institutions face an increasingly
complex threat landscape and set of risks associated with their own digital
innovations. Financial institutions should wake up to this prospect and view cyber
risks not just as a matter for the IT department, but also as a business‑critical
consideration in optimising capital allocation and the whole enterprise risk
management framework. This calls for operational resilience to be viewed in the
industry as no less important than financial resilience.
8
The World Bank, Financial Sector’s Cybersecurity: A Regulatory Digest, December 2017.
9
Financial Stability Board, Stocktake of Publicly Released Cyber Security Regulations, Guidance and Supervisory Practices, October 2017.
13Regulatory Excellence
Financial regulators are playing catch-up in evolving supervisory and conduct
rules to accommodate new technology providers. Nearly half of regulators
surveyed by the Basel Committee in 2018 revealed that they are considering new
regulations or guidance for emerging FinTech services.
Some of the key regulatory changes to date have actively helped BigTech to
consider market entry, even though this was not the stated intention – PSD2, for
example, mandates open access to certain types of customer banking data for
non-bank licensed providers. Furthermore, regulators from around the world,
including Canada, Australia, Mexico and Japan, have sought to reduce the barriers
to entry for non-bank entities and encourage an open market. Such regulatory
changes have helped to create a more balanced and competitive market when the
new players are start-up FinTechs. However, if BigTech firms make a meaningful
play for banking market share, how should the regulatory pendulum shift?
Already the issue of market competition is a key concern for regulators. We have
seen a growing chorus of disapproval from governments and the public regarding
the market concentration in the top-level technology sector, giving rise to anti-trust
concerns and claims that consumers’ interests are not being well-served. Some
commentators in the US are drawing comparisons with past monopolies, such as
Standard Oil, amid calls to break up the dominant market position of BigTech firms.
Globally, ensuring contestability – the ability to compete – is an explicit policy
objective among many financial supervisors, with calls to assess the application of
anti-trust tools, such as merger controls, alongside suggestions to promote parity
between incumbent banks and tech giants when it comes to data sharing.
One potential solution is the recurring debate around the ‘digital tax’ of technology
firms, as proposed by the EU competition commissioner Margrethe Vestager and
endorsed by President Emmanuel Macron’s administration in France. The UK
government and senior members of the Labour Party support the concept – not just
in relation to the income it could generate, but also in harmonising the tax approach
of European countries to ensure that technology firms’ profits are booked where
customers are based (rather than the country with the lowest tax rate).
On the financial institution side, while banks are well-versed in staying on the
right side of the regulators, too many tend to see technological innovation and
regulatory compliance as separate matters: one is about the future, and the other
is firmly rooted in the here-and-now.
However, the ‘tsunami’ of regulatory reforms after the GFC has significantly
increased the compliance and reporting duties of financial institutions. The need
for data granularity and system flexibility has grown to a level whereby banks’ lack
of meaningful innovation is no longer a matter of missed opportunity, but one of
failing compliance obligations.
14Building the Best of both Worlds
Customers want their financial needs and aspirations to be fulfilled in different
ways in the age of digital finance. FinTech has helped to service this changing
customer appetite to date, though it has done so on the fringes of the market.
The assumption is that BigTech firms will make a more fundamental impact on,
and even pose existential challenge to, incumbent institutions.
At the same time, the nature of digital transformation within the banking sector
is set to change. So too, we can expect to see a shift in the relationship between
incumbent banks and the technology sector.
Banks have traditionally sought to access innovation by acquiring FinTech
businesses. There is currently a debate around whether this relationship between
incumbent and FinTech start-ups is set to change. While banks continue to establish
in-house accelerators, incubators and venture funds for FinTech acquisitions, there
is no guarantee this approach will prevail long-term. Banks may look to access
innovative services in more varied approaches.
We are seeing more incumbent banks creating digital ‘offshoots’ in-house, such as Bo
(the digital bank of RBS) and Marcus (the digital retail bank arm of Goldman Sachs).
Given some of the growing political and social headwinds facing the technology
sector, partnerships between a technology powerhouse and a trusted incumbent
financial institution may well present the best route to bringing the best of both
worlds. We are seeing a notable pick up in the collaboration between the giants,
from the joint offering between Goldman Sachs and Apple in credit cards to the
reported partnership between Amazon and Bank of America (BoA) in issuing
business loans, where mutual gains presumably reside in BoA sharing its risk
management capabilities in exchange for Amazon’s superior data insight.
Joint products and services aside, financial institutions are also increasingly
leaning on the technology sector – BigTech firms included – for third-party service
providers (TPPs). This market is expected to grow by nearly 50 percent, from
$37bn in 2017 to over $55bn by 2020, particularly in areas of data provision,
Cloud storage, analytics and connectivity.10 For example, in 2018, HSBC launched
its pilot machine learning projects with Google Cloud around liquidity reporting
and anti-money-laundering risk management. The global bank is also planning
to increase the porting of applications and data workloads onto Google’s Cloud
infrastructure in the year ahead.11
The move to increased reliance on TPPs for banking infrastructure brings with
it new risks. Market concentration among technology providers could pose a
potential threat to financial stability. And how this dynamic would interplay with
BigTech’s expansion in financial services remains unclear.
10
Financial Stability Board, FinTech and Market Structure in Financial Services, 14 February 2019.
11
Computer Weekly, HSBC Looks to Ramp Up Machine Learning Usage with Google Cloud, 27 July 2018.
15Figure 6: Interplay between banking and technology sectors – selected examples
COLLABORATIVE FINTECH COLLABORATIVE BIGTECH
Singapore’s DBS has one of HSBC is working with Google
the largest banking API platform Cloud to launch a Cloud-based
offerings, with over 150 APIs anti-money laundering risk
across categories such as fund management system, which will
transfers, rewards and real-time use machine learning to analyse
payments, as well as lifestyle and data on the behaviour of almost
leisure offerings. 40 million customers.
Santander worked with Ripple Goldman Sachs and Apple are
to launch its international money joining to issue a credit card to be
transfer service, Santander One linked with the Apple Wallet app,
Pay FX, where customers could where users can set spending
complete international transfers in goals, track rewards and manage
near real-time or by the next day. balances, set to be launched in
2019.
Lloyds acquired a 10% stake in
Cloud-based platform Thought Mastercard uses Facebook
Machine, which Cloud-based Messenger to provide technology
platform Vault hopes will replace to small businesses in Africa and
online banking systems and facilitate Asia for affordable digital payments
any type of banking product. The technology, where the Masterpass
move comes as part of the bank’s QR bot will allow business owners
move to digital transformation. to accept QR payments.
Mobile payment app Toss became Launched independently in
a unicorn start-up in December 2011, Amazon Lending is an
2018 with a valuation of $1.2bn. invitation‑only programme that
Having initially launched in South makes loans for companies that
Korea in 2015 as a P2P money may struggle to get traditional
transfer service, it now partners business loans. CNBC reported
with 25 FS firms to provide a full in 2018 that Bank of America
suite of financial services on its partnered with Amazon to reduce
platform. the company’s risk and improve
access to capital.
UK mobile-only bank Monzo
offers current accounts and Amazon Cash allows unbanked
an app where users can track customers to use Amazon’s online
spending and put money into store by showing a barcode at a
“savings pots”, as well as retailer which will then be applied
offering business accounts. to their account.
India’s Paytm is an e-commerce Apple Pay is a mobile payment and
payment system and digital wallet digital wallet service that allows
company. In 2017 it launched the users to pay for goods both online
Paytm Payments Bank, and has and contactless in stores using
two wealth management products their iPhones and Apple Watches.
for simplified long-term savings.
Ant Financial is the world’s largest
Australian-headquartered Clover mobile and online payments
is an algorithmic-based robo platform from the Alibaba group.
advisor which creates goals‑based Its main domain is e-commerce
investment portfolios for clients, users, but has extended to
and rebalances the portfolios. provide a complete online wallet.
COMPETITIVE FINTECH COMPETITIVE BIGTECH
16Conclusion
With the proliferation of FinTech specialists and tech giants in financial services,
incumbent institutions face opportunities for innovation and collaboration as well
as intensified competition, if not existential challenges.
So far incumbent banks still have the track record of enabling consumers,
businesses and economies to grow on their side – but only for the time being.
Building the agility to harness opportunities and the resilience to withstand threats
requires a refocus in digital investment. Banks must now use their digital spend
to preserve and strengthen their ‘disruption proof’ core centred on customer
experience, institutional trust, and regulatory excellence.
At Parker Fitzgerald, we help financial institutions build institutional trust and
optimise risk-adjusted returns in an uncertain business environment. This includes
assisting clients responding to regulatory initiatives and safeguarding themselves
from a changing risk landscape in the era of digital finance.
Our practitioner knowledge of the financial services sector, regulation and technology
gives us a unique insight into the key use cases, be that addressing annual stress
testing requirements, building and validating risk models, or re‑architecting risk
frameworks and operating models for the sustainable adoption of new technologies.
Opportunities in the era of digital finance remain ample. But to move on from
turnaround to transformation, financial institutions must now use digital investment
to enable customers to bank in a way that tech firms will no doubt be itching to do
themselves.
17related Publications from parker fitzgerald’s
Thought Leadership Programme
This report is the latest in a series of publications examining the economic, regulatory
and technology environment, and its implications for the financial industry’s strategic
and risk agenda. For further publications, please visit our website.
Banking in 2019: A Year of Transition
December 2018
Instability is the new norm, and banks must learn to weather it. But doing so
requires a significant maturing in the understanding and management of new
and emerging risks. This report explores what lies ahead for the banking
industry in 2019.
from cyber security to
operational resilience
September 2018
This report examines the cyber risks facing financial services, the current
landscape and future directions of cyber regulations, and the business responses
needed to safeguard the resilience of financial institutions and systems.
sustainable Financial Services in the Digital Age
May 2018
This joint report by UK Finance, an industry group representing nearly 300 of
the largest financial firms in the UK, and Parker Fitzgerald focuses on three
key technologies in finance: artificial intelligence, the Cloud and Distributed
Ledger Technology. It discusses how the advent of the digital economy,
financial regulation and the emerging risks for firms are transforming the
financial services landscape.
POINT OF VIEW
Safeguarding
Digital Transformation:
safeguarding digital transformation
Understanding the Digital Impact on Banking
December 2017
Business Models and Risk Management
December 2017
The adoption of digital technology in the banking industry is shifting
the economic fundamentals of the market, giving rise to a widening
gap between business aspirations and operational reality in the sector.
parker-fitzgerald.com
For further publications, please visit parker-fitzgerald.com
18About the author
Kuangyi Wei
Director, Strategy and External Affairs
Parker Fitzgerald Group
Kuangyi leads Parker Fitzgerald’s thought leadership programme as well as the
firm’s engagement with industry groups, regulators and policymakers.
Prior to joining Parker Fitzgerald, Kuangyi held various thought leadership roles at
both policy think tanks and commercial organisations, including Chatham House,
the State Council of China, and Accenture. Her roles focused on offering strategic
content and advisory for the C-suite and senior government officials. Most recently,
Kuangyi was a Principal Researcher at Accenture’s internal think tank, responsible
for authoring the company’s flagship publications at the World Economic Forum in
Davos and for leading cross-industry thought leadership programmes.
Kuangyi is a regular commentator in business newspapers and broadcast media.
A published author in leading business and academic journals, Kuangyi holds an
MPhil in Economics from the University of Oxford, where she specialised in theory
and policy relating to competition and regulation.About Parker Fitzgerald Group Parker Fitzgerald is an award-winning strategic advisor and consulting partner to the world’s leading financial institutions. Headquartered in London, our global network of senior industry practitioners, technical experts and change specialists is trusted by the leaders of the world’s largest financial institutions, regulatory authorities and government agencies. We are experts in all areas of financial and non-financial risk, regulation and financial technology. We provide independent advice, assurance and market- leading solutions to help our clients navigate their most critical issues, reduce complexity and improve their overall risk-adjusted performance. Our unparalleled knowledge and experience in financial services, world-class thinking and excellence in delivery has seen Parker Fitzgerald recognised as one of the most dynamic and progressive consulting firms in Europe. Areas of expertise include: • Risk Management • Cybersecurity • Financial Regulation • Financial Crime • Banking Technology • Strategic Change • Digital Innovation • Transaction Support Parker Fitzgerald +44 (0) 20 7100 7575 Level 18 info@parker-fitzgerald.com Heron Tower www.parker-fitzgerald.com 110 Bishopsgate @p_f_g London EC2N 4AY Parker Fitzgerald Disclaimer The information contained in this document has been compiled by Parker Fitzgerald and includes material which may have been obtained from information provided by various sources and discussions with management but has not been verified or audited. This document also contains confidential material proprietary to Parker Fitzgerald. Except in the general context of evaluating our capabilities, no reliance may be placed for any purposes whatsoever on the contents of this document or on its completeness. No representation or warranty, express or implied, is given and no responsibility or liability is or will be accepted by or on behalf of Parker Fitzgerald or by any of its partners, members, employees, agents or any other person as to the accuracy, completeness or correctness of the information contained in this document or any other oral information made available and any such liability is expressly disclaimed. © 2019 Parker Fitzgerald
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