Banks versus Big Tech and their Digital Challengers

Amidst the low interest rate environment and economic recession caused by the COVID-19 pandemic, banks are facing additional competition on two fronts: digital banking start-ups and big technology companies including Google, Apple and Facebook. Whilst new operating models backed by technological advancement are challenging the status quo, a number of factors are limiting rapid structural change.


Offering lower fees on payment transfers, higher interest rates in current accounts and more attractive cashback and rewards, digital banking start-ups, such as Revolut, have achieved dramatic growth. In February 2018, London-based Revolut announced that they had reached 1.5 million customers, a figure that had grown to 10 million by February 2020. Meanwhile, Big Tech companies are jostling for entry into the financial sector. As Facebook launches its cryptocurrency (Libra), Apple and Google are building on their success with online payments to unveil digital accounts in partnership with banks such as Goldman Sachs.


With Accenture predicting 155 billion GBP worth of transactions may shift away from cash by 2023, online banking looks set to accelerate. Questions are now being raised over the potential threat that digital start-ups and Big Tech may pose to traditional bank’s operating models. Whilst digital banks, such as Revolut, have displayed strong growth predating COVID-19, many of them are yet to break even. Their popularity is to some extent sustained by loss-making marketing strategies, such as Revolut’s offering of up to 15 GBP to customers if they convince their friends to join or Monzo spending 500,000 GBP in the space of 2 months last year on a similar programme. Coupled with lower payment revenues during lockdowns and the lack of revenue diversification that established banks have, losses at both Revolut and Monzo have worsened since fiscal year 2019, with net losses standing at 106.5 million GBP and 113.4 million GBP respectively.


Likewise, Big Tech’s expansion into the financial sector may not prove as disruptive as it may appear if each company’s situation is examined in detail. By partnering with Goldman Sachs, Apple’s launch of Apple Card in 2019 shares the growth it is projected to enjoy – achieving a 10% market share of payment transfers worldwide by 2025 – rather than drawing customers away from large banks. Similarly, Google Pay would only generate business for banks it partners with, given that the accounts are offered by the banks, not Google.


Furthermore, Apple Card has only been launched in the US. Given the time-consuming process of communicating with local regulators, banks and businesses, it is unlikely that Apple would expand its digital accounts overseas in the near future. Indeed, it took Apple Pay a year to launch in the UK and 4 years in Germany.


Facebook’s plan to launch a cryptocurrency could be the most threatening to the banks yet, with plans to establish a stabler-than-bitcoin, cross border payment system accessible only on Facebook and Whatsapp. This means that Facebook would in effect create a ‘super app’ that offers financial services alongside traditional chatting capabilities, akin to Ant Group’s Alipay and Tencent’s WeChat. Such a cryptocurrency would directly compete with traditional banking.


Libra was initially designed as a floating, standalone currency backed by a basket of physical currencies that would rival the US dollar in terms of stability. However, this was met with immense regulatory resistance from several institutions. Firstly, central banks are concerned that this new currency would threaten existing monetary stability; the EU and Chinese central banks have been keen on setting up a cryptocurrency of their own to ensure oversight. Secondly, anti-trust regulators are worried that the new cryptocurrency would allow Facebook to monopolise payment services – the European Commission has already begun a ‘potential anti-competitive behaviour’ investigation. Thirdly, having previously been fined by the UK Information Commissioner’s Office for privacy breaches, including its failure to protect users’ data in the Cambridge Analytica scandal, Facebook’s data handling reputation is questionable.


These pressures have forced Facebook to adapt the original cryptocurrency idea into a dollar backed (at a one-to-one exchange rate) currency, rather than a standalone currency that fluctuates against sovereign currencies. Facebook has also delegated ownership of the currency to an independent firm, Novi.


At present, it is premature to conclude that banks will face an existential threat from digital banks and Big Tech companies. As they grow in scale, however, further research will likely be needed. Big Tech companies, with their more reliable revenue streams during downturns are better placed than digital banks – although rapid historical growth from digital challengers is likely to enable them to access credit, solving short-to-mid-term liquidity issues. Whether these digital challengers can reach a profitable scale is a different matter. The launch of Libra will be closely watched by banks and regulators alike. Until then, Big Tech’s potential impact is difficult to accurately quantify.


By Nicky Lau

Sector Head: James Float

Posted in