This article first appeared in Fintech Futures on August 21, 2020.
Spend a few moments watching the counter at any coffee shop in the UK and it will not be long before a customer reaches for their phone instead of their wallet to pay for a morning espresso. According to UK Finance, 16 percent of adults are now signed up to make mobile payments. That’s over eight million people. More will follow as COVID-19 increases the attractiveness of contactless payments. And the most popular mobile apps do not come from banks, but BigTech companies.
With global technology giants already operating in the UK financial market, and not just in payments, we worked with the International Banking Federation to look at what this means for customers and what changes existing financial services companies are making to defend their turf, forge new alliances, and give customers the best experiences.
The customer perspective on BigTech
For consumers, it may appear that mobile payments is the only sector in financial services where BigTech companies have made inroads. After all, the digital banks and investment services that have emerged over the past decade have come from start-ups, not BigTech. But look behind the apps and several of the leading home-grown neobanks and fintechs are using cloud services from BigTech to run the back-end of their business. The same is true for big financial services firms.
In the UK, people are three times more likely to say they trust their bank than to say they trust a BigTech company. This lack of trust may be exacerbated by recent events such as an algorithm for a BigTech credit card that gave women less credit than men and the collapse of German fintech Wirecard that left businesses and consumers without payment services. To protect customers from future events like these and to maintain trust in the whole financial system, changes to regulation and institutional structures are needed.
The business view of BigTech
The muscle of BigTech is not to be underestimated. The market cap of the top 20 global BigTech companies is 80 percent higher than the equivalent for banks and they are spending tens of billions of dollars every year on research and development.
We spoke to over a hundred senior financial services and technology executives, policy makers, and regulators and discovered six ways UK financial services are strengthening their position in customers’ hearts, minds, and wallets. This is what we can expect to see play out.
1. Doubling down on digitizing
Most companies have already embraced the fact that customer experience is what is going to help them win in the long run. The way that they are going to deliver on this will be through digitalization. However, whether it is for a new user-friendly app, a rebuild of the back-end data stacks, or even creating a whole new digital bank, the blank-cheque approach to large technology programmes will crash land. Projects that work will have a defined scope that does not endlessly expand and criteria for success agreed at the start and ruthlessly pursued.
2. A focus on the customer and nothing but the customer
BigTech companies excel at giving customers what they want, even before they know they want it: Look at how phones went from having dozens of buttons to just one. The decades of experience and servers full of customer data that financial services companies have amassed give them the opportunity to understand their customers even more intimately. We’ll see them identify the products and services that customers value the most and relentlessly push for improvements and efficiencies that keep them popular, differentiated, and profitable.
3. Teaming up
Collaborations between banks are already working to reduce economic crime and fraud and this will expand into other areas. Coalitions will reduce costs and risks and protect areas of strength or profitability. For example, in response to the coming wave of insolvencies caused by COVID-19, banks could together build a utility to renegotiate loan arrangements. Such actions that aid the UK’s economic recovery will cement the value and goodwill of incumbent financial services companies in the minds of customers and the government.
4. Buying in what can’t be built
Specialist tech companies will continue being bought up by giants in financial services. Given the growing scrutiny on corporate governance, some tech firms are in need of incumbents’ abilities to navigate current and future regulation, and this will make best-in-class capabilities available at more reasonable prices. New acquisitions are additionally beneficial for big organizations as their products can be swapped in and out to ensure the whole system is cutting edge, and they ensure key components unavailable for competitors to use.
5. If you can’t beat them, join them
If UK financial services institutions make the right moves, the main opportunity for BigTech in the market will be from offering better customer and efficiency solutions to businesses than in-house teams or fintechs. In the US these partnerships are already emerging. BigTechs will aim to sell large, end-to-end products, but, as before, if banks want to stay flexible to a changing market and client needs, long-term contracts should be avoided.
6. Collaboration with policymakers
Many in the sector anticipate that there will be more mishaps as new tech players achieve size and relevance in financial services. BigTech players in financial services will make changes to regulation and supervision unavoidable. We have seen from what happened to Wirecard how quickly gaps in corporate governance can take a company from being the most valuable financial services firm on the stock exchange to an insolvent fintech failure. Private-sector firms will start to engage with policymakers via consultations and public-private partnerships to adapt regulation and institutional structures so that they better protect consumers and maintain trust in their systems.
As technology continues to shape the future of financial services, BigTech companies will play an important role, just as they do in other sectors like retail and telecoms. In a mature market like the UK where there is a high appetite for innovation, financial services companies will be working hard to give their customers all the benefits of BigTech without having to compromise their best revenue streams.