Google, the tech behemoth headquartered in Mountain View, is surely a name familiar to most. However, its offerings are far more expansive than merely a search engine. Under its umbrella, an array of tools for our convenience are available, including a web browser, email service, news aggregator, calendar, contact manager, and document development applications. Furthermore, its portfolio stretches to digital photo storage, video streaming, smartphones, laptops, smart home gadgets, and even internet services.
It wasn’t a surprise that the tech giant entered the financial sector. Google, in partnership with Citigroup Inc., plans to provide its customers with joint bank accounts in the future. Facebook, too, has taken a step forward by launching its own cryptocurrency, Libra, and a payment software called Facebook Pay. The social media behemoth has even entered the credit card market. Amazon is speculated to be interested in entering the checking account market soon.
The emergence of fully online banks has created intense competition driven by their user-friendly online banking interfaces and round-the-clock customer service. The opportunity for further advancements by integrating consumer banking into other technology company services is enormous. However, it’s crucial to contemplate whether customers genuinely desire the level of convenience offered and whether the advantages outweigh the likely drawbacks. This blog post will examine the advantages and disadvantages of Big Tech’s foray into the financial industry.
Downside: It’s User-Friendly.
Uber, the popular ride-hailing application, is considering ways to simplify the lives of its customers by introducing financial services along with other services integrated into its app and platforms. With this move, customers can manage various aspects of their life through a single centralized app, providing a more tailored user experience. The app has already expanded into other areas such as food delivery, car monitoring, and offering alternative modes of transportation. These new services add another level of convenience for the customers.
Numerous Asian technology firms have already launched a series of services, and Grab, a ride-hailing service, is one such company that has diversified into the financial industry. It now gives users the option of multiple payment and credit solutions, as well as insurance. Additionally, Grab and Mastercard have teamed up to introduce a physical and digital credit card with no exposed numerical value, offer customers an added sense of security.
In an attempt to offer customers the best of both worlds, major technology companies and banking behemoths are forming partnerships. Google, alongside Citibank and a Californian credit union, will provide checking and savings accounts. Goldman Sachs and Apple have come together to produce the tech giant’s credit card. Additionally, if Amazon decides to offer checking accounts, it may join forces with J.P. Morgan.
Although these partnerships are established to facilitate technology firms’ entry into the conventional banking industry, customers also reap the benefits. The financial institutions involved possess the necessary knowledge and expertise to offer services most efficiently. When well-known banking brands are associated with them, consumers may be more comfortable handing over their money to technology firms.
Advantage: Expanding Accessibility to Financial Services
Individuals above 18 who don’t have access to conventional banking services are referred to as ‘unbanked’. The absence of nearby bank branches and resistance to paying related banking fees are among various reasons why individuals may be dissuaded from opening a bank account. Without access to physical currency, people without a bank account may find certain services, such as utility payments, hard to afford.
According to the Milken Institute Review, digital accounts offered by Big Tech could potentially aid those who are financially excluded in the following manners.
- Eliminating the requirement for a physical bank branch
- Decrease in charges for financial services
- Direct competition with traditional banks increases the likelihood that all entities will provide satisfactory services.
As mentioned in the article, the Amazon Cash program enables users to purchase items on Amazon by depositing cash at participating merchants and kiosks. This is just one of several initiatives the company has launched to enhance access to online shopping.
Disadvantage: Insufficient Oversight
In a recent interview with CNBC, Sarah Kocianski, Head of Research at a leading FinTech company, discussed the probability of big technology enterprises continuing to provide banking services without becoming fully integrated banks. She believes that these companies may be unwilling to go through the trouble of obtaining and maintaining a banking licence.
As the practices of IT companies become increasingly similar to those of financial institutions, regulatory bodies are keen to ensure that these firms are subject to the same regulations as banks. The Chinese government has mandated that all technology firms must reserve 100% of their outstanding shares with the central bank and link some of their online bank accounts to traditional banking accounts. In debates regarding competition policy, the European Union has been at the forefront, with calls for tougher antitrust enforcement.
As per the Bank Holding Company Act of 1956, commercial businesses are prohibited from owning banks, and the Federal Trade Commission (FTC) has conducted several hearings on market concentration. As a result, it is probable that digital companies will continue to maintain their ties with conventional financial institutions.
Potential Economic Implications
The growing clout of Big Tech in the financial sector has raised concerns among many. According to The Guardian, these companies are employing their power to evade regulation, similar to what major banks have done in the past. In the process, they are attempting to persuade us that they are entitled to special exemptions and should be permitted to operate under separate regulations.
The Financial Stability Board (FSB), an international regulatory entity, has cautioned about the possible hazards involved with the financial operations of technology firms. These hazards consist of the weakening of conventional financial institutions resulting from increased competition, potential financial partner failures, and the concentration of financial services in specific regions. The FSB has emphasized the significance of meticulously considering and assessing the consequences of these risks to ensure the sustained stability of the worldwide financial system.
Drawback: Disclosure of Personal Data
The potential misuse of personal information is a significant concern when considering the utilization of Big Tech in the financial sector. Technology firms aim to gain a better understanding of their customers’ behaviours and patterns to deliver more customised and applicable advertising. This frequently involves accumulating data on when and where consumers make purchases, how much money they spend, and the products they purchase. Ultimately, this raises concerns about privacy and the possibility of companies exploiting this data for their own benefit.
The advancement of technology firms may be impeded by the reluctance surrounding the sale of customers’ data to advertising companies. According to a survey conducted by Morning Consult, 63% of adults in the US are hesitant to accept free services in exchange for the sale of their personal information. This percentage may rise as people gain more knowledge about how tech giants use their data.
Is the Entry of Big Tech in Finance Beneficial or Detrimental?
It is challenging to conclude whether the incorporation of Big Tech in the banking sector is beneficial or detrimental due to the subjective nature of this issue. However, the application of Big Tech in banking could have a favourable impact on numerous individuals’ lives. The improved access, stability of banking associations with established financial institutions, and the prospect of financial inclusion are all potential advantages of Big Tech in banking.
It is worrying that these companies might evade regulatory supervision, disrupt established markets, and misuse customer data without proper authorization. Whether the benefits of this outweigh any possible downsides remains to be seen and can only be evaluated by observing the long-term consequences.