“We are seeing some companies looking to establish a payment system that bypasses our banks and our currency,” US Federal Reserve governor Lael Brainard said in early August, announcing the central bank’s plans to launch a new payments network. “Facebook's Libra project raises numerous concerns that will take time to assess and address.”
In any other decade, it might have been odd for a member of the board of Federal Reserve governors to single out a firm when launching a new – and seemingly positive – initiative. But given the size, power, and apparent interest BigTech now has in the retail banking world, it seems regulators have a bone to pick.
Much of that power has been built on the data the GAFA bunch – Google, Amazon, Facebook and Apple - have collated in recent year: data arsenal that has seen them gain a combined market capitalization of just under $3trn. When Chinese giants Tencent and Alibaba are added to that figure it grows close to $4trn, more than double the combined capitalization of the next 15-largest internet companies in the world.
“Governments will have concerns,” says Nanda Kumar, CEO of banking software firm SunTec. “Regulation will definitely come into play.” Kumar stopped short of predicting whether the problem would be an insurmountable one for the tech giants, but added that if they plan to take on the banks, they must be prepared to do so on a level playing field.
For Mayra Rodriguez Valladares, managing consultant at MRV Associates, the collection and exploitation of data is a major strength for BigTech. “They know how to collect data, they know how to parse it, they know how to differentiate between good data and bad data. That data has unbelievable value.
“These companies know exactly what we like, don't like, what we buy, what our health condition is, what our political views are, and how we're connected to other people. They are in a much better position than the banks when it comes to targeting and selling financial products. They know if we have kids or not, so know what kind of insurance to offer. They know if we’re in college and need loans.”
During Facebook CEO Mark Zuckerberg’s testimony to the US Congress about the company’s collection and use of data, Representative Ben Lujan challenged the tech CEO on the amount of data points the firm had collected on its registrants citing reports it was up to 29,000 points per user. Zuckerberg didn’t give a direct answer, but did say the social media giant collects data on both users and non-users, including potentially detailed profiles on people who hadn’t signed up for the service.
While social media platforms like Facebook can utilise user inputs, preferences, likes and clicks to gather data points, banks are more constrained. “The only way a bank could find out that information is by asking me,” says Valladares. “Certainly, they could find some things out about me but nothing in comparison to what the technology companies will have built up.”
Kumar believes the BigTech firms can capitalise on captive, highly engaged audiences by creating better front-end experiences. Through doing so, in-app purchasing capabilities can cut out swathes of middle men and further create competitive advantage over banks.
“The future is going to be facilitating human needs. For example, someone sending you a link to an outfit which you like and you being able to buy it straight away from the platform you’re chatting on. When that kind of experience is brought together in a single point, can it be provided by a bank?
“The technology companies are fulfilling your transactional day-to-day needs and breaking into small segments of a bank’s business with things like one-click purchasing with credit. They are chipping away at financial services’ revenue avenues and where the banks are making money.
In November 2018 Amazon debuted the ability to pay for high-ticket items like electronics and computers in monthly instalments. Financing is available to Amazon customers through its two credit card options: the Chase Bank-backed Amazon Rewards Visa Card and the Synchrony Bank-backed Amazon Prime Store Card.
Banks affect two sides of a consumer’s lifestyle, says Kumar: managing money and spending money. The latter is where the technology firms are trying to make their impact.
According to an April 2019 study from FIS, 71 percent of banking interactions now occur digitally, with just under half (47 percent) occurring on mobile. 59 percent of UK adults have used mobile apps to access their financial services. 35 percent of those asked wanted their banks to invest in their apps to provide new payments options in-app in the future.
Kumar believes banks can capitalise. Where a bank could make comparisons between an Amazon or a firm like Tesco or Walmart when a customer looks at a certain product, with discounted prices for being a customer of a certain bank.
“If you are going shopping would you go to a mall, or go to individual shops on the street? What experience does the customer want – something where they go into one silo to pick up one set of goods and then so on, or one where everything is available to them in one place? As a bank right now, you are going to want to be in every part of your customers’ lives.”
A foot in the market
While governor Brainard’s speech mentioned Facebook’s Libra it’s far from the first time GAFA has stepped into the payments world. Amazon’s first payments project launched in 2007 under the name Pay with Amazon, the same year it acquired peer-to-peer mobile services firm TextPayMe and financing platform Bill Me Later. It relaunched the former as Amazon Webpay in 2011, before shutting it down in 2014. Bill Me Later was bought by PayPal in 2008. The Amazon Pay of 2019 exists as a digital wallet for customers and a payments network for retailers.
Google has a limited financial services footprint in the form of its Google Pay digital wallet. Users are able to send money via the wallet in the UK, India and the US, while it can be used to make payments in more than 75 other countries.
Apple launched its Goldman Sachs and Mastercard-backed credit card in August to select customers, offering three percent cash back on Apple products, two percent on Apple Pay purchases and one percent on everything else. Goldman Sachs is overseeing transactions for the technology firm.
Similar relationships with big financials seem to suit BigTech, which let the tech firms lean into the retail banking sphere without all the red tape.
Mitesh Soni, technology evangelist at Finastra suggests BigTech firms know their limitations and are happy to fly under the regulators’ line of sight. “They don’t necessarily want to set up a bank. The approval process, the jurisdictional questions, the additional complexity of having multi-region accounts shouldn’t be underestimated. They don’t want to be in that business. They want to be creating seamless experiences for their customers and more convenience.”
Valladares says the regulatory requirements banks are tied to – the capital and liquidity rules imposed on market participants in recent years - are holding them back in a software innovation race with BigTech. “Precisely because they are not banks, precisely because they are not broker-dealers or security firms, they don't have the financial regulatory requirements, be it capital or leveraged liquidity. They can use their common equity and retained earnings to continue to invest in research and ways to tailor products.”
But the motivation to regulate BigTech is there.
“In the US we’ve seen a lot of interest in wanting to regulate Facebook and Amazon,” says Valladares. “Regulators are still trying to play catch up and figure out how they’re going to do this, but the more that these tech companies want to offer different kinds of financial services, you will have a variety of regulators who will be able to step in.
“Even though they don’t like regulation, the banks know how to deal with it and know what kind of reporting infrastructure they need to build. They know that they need independent compliance and independent auditors they need to invest in a system for monitoring.”
Competition and other authorities are closely eyeing BigTech. The European Union has launched three separate antitrust investigations into Google relating to the firm’s Google Shopping and Google AdSense verticals, and the Android operating system. In July 2018 it was fined $5bn, the largest imposed by the EU on a company for anticompetitive behaviour. In the US, the Federal Trade Commission (FTC) and the Justice Department announced that they would be reviewing how online platforms like Google, Apple, Amazon and Facebook have “achieved market power … and are engaging in practices that have reduced competition and stifled innovation”.
Facebook-backed virtual currency Libra has faced intense regulatory scrutiny following its announcement in June. Libra is a cryptocurrency minted on the Libra Network, a blockchain developed by a Switzerland-based consortium, led by Facebook. The currency is backed by a not-for-profit organisation called the Libra Association, which oversees the network and manages the reserve with which Libra will operate with. As yet the project exists only in experimental code, according to reports.
The US House Committee on Financial Services wrote to Facebook a week after Libra’s announcement demanding that the social media giant halt all development on the project until it had answered to them in a hearing.
Democrat senator Sherrod Brown, endorsing the Senate Banking Committee’s actions, wrote: “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
The Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) have yet to approve the handling of digital currencies by any bank. Only Wyoming’s special-purpose depository institution (SPDI) rules allow the holding of digital assets.
The UK however, seems to be more welcoming to the idea of Facebook running its own cryptocurrency. In May, the country’s dailies reported meetings between Zuckerberg and Mark Carney, governor of the Bank of England, in which the two discussed Globalcoin – a digital currency that would bypass the traditional payments network. Neither the BoE nor Facebook commented on the reports, but on Libra Carney told an audience at a European Central Bank symposium that there “would be no open door for Libra in the UK, and that it would have to meet the highest standards.”
Elsewhere in Europe, French finance minister Bruno Le Maire called on the governors of the G7 central banks to produce a report on Libra. He added that governments have a right to ask Facebook for guarantees over whether Libra will become a rival to fiat currency. The chairman of Russia’s State Duma Committee on the Financial Market, Anatoly Aksakov, told local radio station Kommersant FM that Libra would be banned before it could be used. The Swiss Federal Data Protection and Information Commissioner, which was cited by Facebook head of blockchain David Marcus as overseeing the development of Libra, told CNBC it had not heard from the tech company at all.
The Japanese government announced it would be investigating Libra and analysing its potential effect on monetary policy and financial regulation.
Valladares says regulators, wary of market headwinds, are likely to be scrutinising potential new risks closely. “There have been a lot of concerns over recessions. Germany looks to be in a recession, the UK is teetering on the edge of one. That’s made regulators very sensitive when it comes to making sure that financial institutions are following regulation. On top of that they’re really feeling the heat when it comes to meeting what new challenges might be coming their way, anything that could hold a form of systemic risk.” The last thing regulators want to be blamed for, she adds, is allowing something dangerous and new into the market.
Not all regulatory responses to BigTech ventures have been hostile. Google has received emoney licences from Bank of Lithuania and the Central Bank of Ireland, obtained in 2018 and 2017 respectively. The licences enable it to process payments, issue electronic money and handle virtual wallets. The licence also gave the tech company permission to operate those services throughout the EU. Additionally, Google has a licence in the Republic of Ireland to acquire and issue payments under the second Payments Services Directive (PSD2), granted in January 2019.
“Banks as regulated entities have a societal responsibility to maintain financial infrastructure in a proper way,” adds Taylor. “It isn’t a fair fight if they have those obligations and the technology companies don’t. In saying that, if the banks won’t do the innovation someone has to. We can’t just sit here with cheques and cash and clearing that takes days.”
Targeting the underbanked
One area technology companies can make an impact, argues SunTec’s Kumar, is in the development of solutions for unbanked and underbanked people. “Developing markets are naturally more susceptible to new technology, where unmet needs can be filled.”
Amazon has attempted to enter the underbanked and unbanked markets with its barcode-based Amazon Cash project. Users can scan codes at participating checkouts to deposit money without the need for a bank account.
Mobile payment solutions like M-Pesa in Kenya, and WeChat and Alipay in China, are predicated on the idea that while bank accounts might not be ubiquitous, mobile phone ownership is. According to June data from the Pew Research Center, 45 percent of people in emerging markets own a smartphone, with the number rising for those who own a mobile that isn’t a smartphone.
The mobile banking units of Chinese internet giants Alibaba Group and Tencent Holdings have lent to more than 100m people. The former uses an artificial intelligence platform to offer different interest rates to clients based on a calculated risk rating. In an interview with Nikkei Asian Review, Hu Xiaoming, chairman of Chinese digital bank and TenCent-backed WeBank, said its ratio of nonperforming loans sits at one percent.
Ant Financial Group, which owns Alibaba and Alipay, is working on a number of virtual wallet partners across the world, all mobile-based and built on the use of QR codes. According to Yana Geng, head of UK and Ireland for Alipay, the group now has more than a billion users across the world in multiple markets, but favours Asian markets to capitalise on a maturing market.
“We have partnered with several wallets in Europe. We’re encouraging this more mobile and convenient lifestyle globally, and introducing it to consumers outside of China. We naturally have more wallet partners in Asia, because the environment is more suitable – for example there are more people unbanked and underbanked.
Six European mobile wallets are now QR-enabled in partnership with Alipay – Bluecode (Austria), ePassi and Pivo (Finland), momo Packet (Spain), Pagaqui (Portugal) and Vipps (Norway). Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) granted Alipay an emoney licence in January 2019.
Geng adds that overall, a QR system can also be more secure and easier than a card payment, and that is what has grabbed so much interest from outside China. “It’s a fully encrypted token. When it comes to security it’s not a card number or a user number. Nobody can do anything with it if they take it.
For Kumar, although Tencent and Alipay dominate the market in China, the emergence of consolidated payments behemoths is not a great risk. “The way that [AliPay and Tencent] grew in China is that they definitely had a protected environment and an advantage. If you take a market like India, which is much more open and has multiple competing players, there is no one company taking dominance.”