Internet giants will be the banking front-end

A few months ago I wrote about the idea of an Amazon bank and expressed a certain amount of scepticism that Amazon would want to become a regulated financial institution, especially give the alternative of becoming the higher return-on-equity distribution mechanism for the lower return-on-equity heavily regulated financial products. At the time, I noted that almost half of US consumers surveyed said that were “open” to the idea of Amazon as the provider of their primary bank account. Now I see a survey from the management consultants Bain that says that two-thirds of Amazon Prime respondents would be willing to try a free online bank account offered by Amazon and a third of people who don’t buy from Amazon at all would do so.

The Prime figure is especially important because Amazon customers control three-quarters of US household wealth, which is quite an incentive for Amazon to step in between the banks and their customers. But I think my original point stands, which is that Amazon can do this without becoming a bank. Alex Brazier from the Bank of England put it clearly in a speech earlier this year, noting that “by allowing customers to connect to a range of banks and service providers through a single point, Open Banking could open to the door to the ‘unbundling’ of banking”.

I don’t think there’s any “could” about it. In fact, it could be argued that that’s a good thing – assembling optimal (for the customer) bundles of services from different providers is actually quite an appealing vision of the banking front-end of the future. The problem, from the banks’ perspective, is that that the front-end neither needs to be a bank nor wants to be a bank. Quite the reverse, in fact. The people who are good at front-ends (eg, Amazon) are perfectly happy to take control of the interface with the consumer and leave the banks as heavily regulated, low margin pipes sitting out of sight as the equivalent of utility companies but for money rather than gas, water or electricity.

Bain talk about a “a cobranded, mobile-friendly, checking-account-like product” which may well be what is achievable in the US market but in other markets around the world where the regulators are pushing through open banking to force more competition into the financial sector, I don’t see why Amazon would cobrand. My guess is that things will go the other way: customers want the Amazon brand, they couldn’t care less whether their Amazon Account is actually held by Santander or ING or Danske or anyone else. They’ll probably never read the small print to try and find out.This is why, I imagine, that a few months ago Bain said that in the UK the banks could see between one and two billion of annual pretax profits vanish because of open banking disintermediation unless they take some pretty dramatic action.

But what can they do? Well, they can become technology companies. Now, I know that the “meme” that banks are, essentially, a special kind of technology company (special because they are granted special privileges that other companies do not have, such as the ability to create money) is not mainstream, it deserves attention. It means, apart from anything else, that bank boards will need to include switched-on technologists and take a strategic view of technology, as Christian Edelmann and Patrick Hunt said in the Harvard Business Review: “Technology specialists will play a greater role in allocating investments, working alongside senior management from a more traditional background”.

From my early experiences as an advisor to boards in the FinTech space, I can see the dynamics at work here. To pick an obvious topic, some financial organisations’ early response to open banking was to see Application Programming Interfaces (APIs) as something to do with technology and therefore not strategic. This left them on the back foot against those organisation who saw the real context. All of which points to the future signposted by my old friend Brett King in his new book “Bank 4.0”, in which he says that the foundation of banking in the coming era is “being great at technology”.  In his closing chapter on “The Roadmap to Bank 4.0” Brett quotes Francisco Gonzalez, the Executive Chairman of BBVA, as saying that sooner or later it will be the internet giants (including Amazon) who will be his main rivals rather than other banks. This is why BBVA is reinventing its processes to being new products and services to the markets. Other banks are, of course, trying to do the same.

But can banks really become technology companies? Many observers think not. Instead they posit a future for banks as financial factories who have to accept the new order and partner with Amazon and others. Lenders would manufacture financial products, and tech giants would serve as distribution and servicing channels. In other words, Amazon’s future is to do with financial products what Amazon already does with other products. What’s more, as that Bloomberg article notes, because Amazon wouldn’t have to pay to lure customers — it already has millions of them — it could afford to set up digital accounts without “all the nuisance fees and relatively high minimum balances” that lenders impose. The Wall Street Journal says similarly that banks “face pressure to build relationships with big online platforms, which reach billions of users and drive a growing share of commerce” when reporting on Facebook’s request to banks to share detailed financial information about their customers, including transactions and balances, “as part of an effort to offer new services to users”.

(Remember, in Europe the banks won’t be able to say no to this.)

This transition for banks, the transition to operationally-efficient manufacturing of financial services while others take care of the distribution, will undoubtedly have casualties. It is no exaggeration to say that it is not clear that all of today’s retail banks will survive it.