Apple CEO Tim Cook introduces Apple Card during a launch event at Apple headquarters on Monday, March 25, 2019, in Cupertino, California.
Noah Berger | AFP | Getty Images
When Apple announced its credit card last month with a big, splashy announcement, Goldman Sachs was a major reason behind it. But you wouldn’t know that based on where the bank’s CEO was standing.
David Solomon wasn’t on stage in Cupertino, California, sharing the spotlight during the product announcement on March 25. Instead, it was Apple’s Tim Cook touting their effort as the most “significant change in the credit card experience in 50 years.” Goldman Sachs’ chief executive stood clapping in a crowd with the other onlookers. The 150-year-old Wall Street bank — responsible for the actual lending part of the credit card — was just a footnote in the presentation.
The bridesmaid role is something big banks may have to get used to. As tech giants begin to wade into consumer finance, they’ll need someone to handle the critical and complicated banking aspect. The banking industry faces the dilemma of embracing the back seat, or losing what could be valuable partnerships with tech giants that have hundreds of millions of customers.
“Banks and financial services companies are acutely aware of the threat from the big tech companies,” said Gerard du Toit, banking consultant at Bain. “It’s a classic prisoner’s dilemma — they don’t love it, but if tech companies are going to become an important source of distribution for them, what else are they going to do?”
At stake for the North American financial industry is up to 40 percent of the $1.35 trillion in revenues that could migrate to tech companies like Amazon or be lost to price competition, according to McKinsey. The risk for banks rushing into partnerships is that tech companies will own the customer relationship and branding in these deals, keeping the most lucrative parts of that relationship, according to the consulting firm.
Tech giants such as Amazon and Google parent Alphabet have already taken steps to encroach on banks’ turf in areas ranging from small business lending to payments. That’s because of their need to fuel revenue growth in new verticals and strengthen their grip on existing businesses. Big U.S. tech firms are also preparing for a global battle: Chinese tech giants like Alibaba and Tencent have already become juggernauts in payments and investing thanks to their mobile payments apps.
Apple’s new card backed by Goldman Sachs and Mastercard typically works with Apple Pay, the mobile wallet that lets customers pay with their iPhones. The feature is increasingly important to Apple as it leans on services revenue to offset the slowing growth of iPhone sales.
Google, meanwhile, has Google Pay, a similar online system that lets customers buy things in the app store or tap to pay on Android devices. Facebook, which lets users make payments via its Messenger feature in certain markets, is also reportedly working on a way to use cryptocurrency to facilitate payments through WhatsApp.
Du Toit said Google and Facebook appear to be getting into payments to make it easier for a customers to follow through with a purchase based on advertising. For instance, Facebook offers a feature through Instagram that allows users to buy products directly inside the app. Data from such transactions can be valuable to prove to advertisers that it worked, and the customer actually bought something, du Toit said.
And then there’s Amazon, which has a small-business lending arm that has facilitated more than $3 billion in loans to more than 20,000 of the merchants on its e-commerce platform. It has a debit card-like product called Amazon Cash, which allows users to put money into an Amazon wallet and buy online without a credit card. There’s also Amazon Pay, which lets consumers buy things on other sites without reloading their credit card information.
Amazon’s playbook seems to aim at building a closed-loop system and cutting out another middle man, du Toit said.
“There’s massive cost savings from not having to pay interchange on a purchase — there’s immediate savings on the back of that,” the Bain consultant said. “But second, it starts to deepen into the relationship with the customer and fulfill the mission of being able to sell anything that you could possibly want to buy online.”
‘We’re not trying to be banks’
Despite their push into financial services, U.S. tech giants have stopped short of becoming banks themselves, in part because of the historic wall separating banking and commerce. Since the 1933 Glass-Steagall Act, companies involved in commerce couldn’t also become banks out of fear that a hybrid company would make irresponsible loans to itself or unfairly deny competitors’ loans.
Walmart, the world’s biggest retailer, tried for nearly a decade to break that barrier by establishing its own bank. Whether it attempted to buy a local bank or apply for its own charter, each time the giant was stymied by a consortium of regulators, lobbyists, lawmakers and watchdogs. It eventually gave up, withdrawing its request for a charter in 2007.
“We’re not trying to be banks,” said Brian Peters, executive director of Financial Innovation Now, an alliance of companies including Amazon, Apple and Google that advocates for e-commerce technologies. “We’re approaching those customers the way we typically approach customers as technology companies, and doing our best with the financial partners that we have. For a while, that’s the way it’s going to be.”
Even the partnership route can be complicated in the United States, which has more stringent regulations than Europe and Asia. Amazon is reportedly looking to partner with J.P. Morgan Chase to launch checking accounts, which would give the e-commerce company even more customer data and allow it to avoid some transaction fees. But according to a January report in The Wall Street journal, regulatory issues have complicated the project. It’s unclear if Amazon will go forward with J.P. Morgan or any other bank, the Journal said, citing people familiar with the negotiations.
Still, the partnership model can be mutually beneficial to both sides.
“Banks are uniquely skilled at understanding treasury management, compliance, and credit risk management,” said Nigel Morris, co-founder of Capital One Financial and now a partner at venture capital firm QED Investors. Those areas can be difficult for big tech to match. Tech companies, meanwhile, “are uniquely capable of originating customers, delivering a great user experience and selling innovative products that customers love,” he added.
That doesn’t mean bank executives don’t view tech giants as a threat. When asked about the Apple Card at a banking conference this month, Bank of America CEO Brian Moynihan said he was worried about the risk of being disrupted.
“Everybody’s a threat to us,” Moynihan told CNBC. “I wake up every morning paranoid about who’s trying to wipe us out. But I think they’re threats we can handle.”
As a result, the banking industry isn’t sitting still. In 2015, J.P. Morgan Chase CEO Jamie Dimon warned in his annual shareholder letter that “Silicon Valley is coming” to try to eat the industry’s lunch.
So for the past few years, big banks have been preparing for upstarts by building their own applications, reorganizing their tech staffs to innovate faster and partnering with fintech firms.
By offering their own tech solutions, banks hope that outsiders — whether they’re big tech companies like Amazon or fintech upstarts like Square — won’t be able to pry away their customers.
Last year, J.P. Morgan unveiled YouInvest, its answer to free-trading app Robinhood. Citigroup and others have released digital-only banking apps, and Bank of America is planning to unveil a financial coach called Life Plan in the fall, CNBC reported this month.
By making these moves, traditional banks are acknowledging that in this era of blurring boundaries between industries, everyone is a competitor.
Amazon and other tech firms have at least one significant advantage versus banks: Customers enjoy using their products more.
Based on what’s known as “net promoter scores,” customers much prefer Amazon to banks. The e-commerce giant earned a 47 in the score that measures the likelihood a user would recommend a company’s services, according to a September report from Bain. National banks scored an 18, while regional banks came in at 31.
Amazon customers may be open to a potential invasion of their wallets. Bain asked 6,000 U.S. consumers in 2018 if the company launched a free online bank account that came with 2 percent cash back on all Amazon purchases whether they would sign up to try it. About two-thirds of Prime members said yes.
“When big tech companies choose to go into banking, they already have brand reputation and they have the distribution,” said Karen Mills, senior fellow at the Harvard Business School and a former administrator of the Small Business Administration. “Customers have proven that they will flock to whoever gives them a better experience.”