The rising threat of fintechs to the financial industry is hardly new, but it seems that increasingly, large banks are worrying about tech companies encroaching on customer financial decisions.
Royal Bank of Canada’s Dave McKay recently made news when he remarked that he is growing more concerned about FANG companies – Facebook, Amazon, Netflix and Google – getting into banking.
The remarks were made at the RBC Financial Institutions Conference in New York. “They are getting between us and the moments of truth of our customers, and currently what they do with that is they sell that insight back to us in the form of search and advertising and other perspectives, and they earn a certain amount of economic rent,” said McKay, adding that the amount of money FANG companies are seeking from banks “is growing”.
These comments come as the banking industry grows concerned about the possibility of tech giants sidelining banks by handling direct payments and other financial services. Already, banks are required to open up large amounts of customer financial data to tech companies. A new EU directive coming into effect in September – will require banks to give FANGs access to customer bank accounts via APIs so that customers will be able to make money transfers through third-party apps.
The fear is that these APIs will allow tech companies to sideline banks by leveraging customer financial data to create their own financial services apps. It would be hard for most banks to compete with a company like Facebook because tech companies, like Facebook, already have a huge advantage in being able to anticipate a customer’s financial need.
Said McKay, “if it’s a financial service, what’s to stop them from making that offer before you’ve even come and told us you want a car, you want a mortgage, you want to buy a washing machine, you want an increase on your credit card to do that? You’re broadcasting to the world what’s going on in your life and what you’re interested in. It’s not hard to deduce what the financial need from that might be at the end of the day.”
It’s important to note that the threat posed by tech companies isn’t a future threat, it’s one that banks are already facing. McKay said he wasn’t just concerned about FANG companies, but also apps like Uber, in that once a payment source is set up, users interact more with the app’s brand than the bank’s brand.
The concerns go beyond just RBC. Bharat Masrani, CEO of TD Bank, has previously made similar remarks about concerns over “non-traditional competitors”.
Large banks are scrambling to get ahead
McKay says the best way to respond to this threat is to expand services and become a bigger part of their customers’ lives, become who they turn to “before they have to make a financial choice”. “You think about someone getting between you and your customer with that information and starting to influence the customer to choose different providers,” he said. “And therefore, you want to go back to a world where you have a deep enough relationship with a customer that they have an incentive to tell you because they trust you, because you provide them with great service, but also because they think you’re the most relevant provider for them going forward.”
McKay was clear that while this was not yet a threat for RBC – Canada’s largest bank – he wants to make sure it doesn’t become one.
RBC has already invested heavily in mobile. The Canadian bank spent more than $3 billion in the last fiscal year on technology, and now employs more than 200 data scientists. Their digital initiatives range widely from cyber security to AI. And that investment has been paying off: currently RBC has 3.4 million active users, an increase of 19% from last year.
However, some large banks may be asking themselves – if you can’t beat them, why not join them? Last year, it came out that Amazon was in talks with major U.S. banks to offer bank accounts to Amazon customers. If such a service goes through, the fate of smaller regional banks could be unclear. What would happen to smaller players if only national banks with the deepest pockets were able to make such partnerships to stay in the game?