Should banks worry now that they have new competition?
Whilst Amazon grabbed global headlines with its $13.7b acquisition of Whole Foods last year, banks also paid close attention to a less ballyhooed development: the e-commerce powerhouse has been building up a range of financial products, including Amazon Cash, as well as a billion-dollar lending operation for small businesses. Some banks might think of disruptive fintech firms as their greatest emerging threat, but well-trusted and well-oiled platforms like Amazon and Alibaba could soon pose a formidable challenge to banks in retail banking, according to analysts.
“It turns out that retail banking is being upended not by nimble fintech startups, but by established tech firms,” said Gerard du Toit, partner at Bain & Company. “Many of the tech giants possess the ingredients of success: digital prowess, large customer bases, organisations well versed in improving the customer experience, and ample leeway to extend their corporate brands into banking,” he noted.
Asian e-commerce behemoths like Alibaba and Tencent are starting to break into banking. du Toit said that Alibaba has built up the world’s largest money-market fund, issuing $96b of loans in five years, and its Ant Financial has ballooned to a market capitalisation close to that of the ninth-largest bank in the US. It has also established the online bank MYbank, which boasts of instant loan approvals by assessing consumers’ financial history with the Alibaba platform.
“Demand for alternatives to traditional banks will only grow, as younger respondents in our survey showed the greatest willingness to try these offerings,” said du Toit, citing a Bain & Company survey asking more than 100,000 consumers in 22 countries. “Given that Amazon, Alibaba, and others already sell payment services, credit cards, and loans, it’s plausible that they will offer a suite of retail banking services in the near future,” said du Toit.
Are banks threatened?
Top technology firms also benefit from the comparatively high trust placed on them when it comes to financial transactions, dulling a key competitive edge that traditional banks has long held. “Should banks worry? They do appear to be vulnerable to losing the special status they once enjoyed,” said du Toit, citing how US and UK consumers ranked PayPal and Amazon nearly as high as banks for trust with their money.
Banks are starting to find increasing competition for customers and profits from platform companies like Alibaba, Amazon, and Tencent, said Miklós Gábor Dietz, senior partner at McKinsey. “The idea of fintechs as a threat to retail banking might be receding. But the new strategies adopted by the aforementioned platform companies are even more challenging for incumbent banks,” Dietz said.
The strength of platform companies is that they create “ecosystems” that reduce customers’ costs, increase convenience, provide them with new experiences, and whettheir appetites for more. “Not only do they have exceptional data that they exploit with remarkable effectiveness; they are also often more central in the customer journeys including big financial decisions,” said Dietz.
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