Why does Google want to be your bank ?
Financial technology is a complex space and heavily regulated. Traditionally, big tech companies have stayed away from it. Why is Google entering now?
On one level, it has almost become a futile exercise to analyse when a big technology company like Google, Amazon or Apple tries to enter an industry which is not their core offering. Its easy and probably right to assume that growth or increasing their moat is the essential reason behind these decisions; Amazon buying Washington Post, Apple launching a credit card or Google releasing home security products. Although, growth is the ultimate reason, it is interesting to analyse how a particular company came about with a big decision like this.
The whole banking industry and the technology associated with it, is both old and complex. I can relate to it personally, since on my first job at Goldman Sachs, I was puzzled both by the amount of financial concepts involved (derivatives, securities, commodities etc) and the multi-faceted technology infrastructure that went into supporting it. This is one of the reasons, I was surprised by Google’s decision to enter into the banking space and offer checking accounts to users. But, maybe its not surprising at all, since the company’s mission always has been to organize world’s information and financial information is a key part of it as well. What has changed though is Google’s emphasis on being more helpful. As Sundar Pichai said in this keynote -
We are moving from a company that helps you find answers to a company that helps you get things done.
Besides being more helpful, there are other collateral short term and long term benefits that may have made the company’s decision easier. We look at them in detail.
Ambient computing
Ambient computing is all about making sure technology is there when you need it. The hardware effort at Google with Chromecast, Pixel book, Nest, Google Home, Google Wear, Pixel buds try to make sure that technology blends in with your life. This statement from Rick Osterloh.
We think technology can be even more useful when computing is anywhere you need it, always available to help you. Your devices fade into the background, working together with AI and software to assist you throughout your day. We call this ambient computing.
This is a compelling vision and something that makes other goals or pursuits (like augmented reality, wearables) feel smaller as pointed out here by Ben Thompson. But I think, the more important part of this vision, where probably the most effort will be required, is where the devices have to assist a user. For instance, Google search which is by far the most intelligent product in terms of knowing about your likes,dislikes and your intent. It still involves some research, in terms of looking at the search results and finding the useful info. When it comes to ambient computing; it might not become hugely successful until the smallest level of friction is gone. For example, if you need to know that whether you can afford to go out for fine dining; the answer is what comes next. Not the fact that you have to check your account, find the number of transactions you have done in a month and then do some mental calculation. Achieving this means Google should know about the most pressing needs of the user and know it in and out to remove any friction for users to trust it. Money is probably a universal top of the mind need. If Google can understand the relationship people have with their money and can help improve the same, it can build for itself a very powerful motivation in the minds of users. Also because money management remains the least time spent activity for various reasons, any removal of friction will help people achieve more with less.
The age-old financial tech infrastructure
Most of the banks in USA are powered by three companies when it comes to banking technology infrastructure. This has resulted in a monopolistic kind of attitude from these companies towards banks, especially small and medium sized ones. This article from WSJ explains
Fiserv and two competitors— Fidelity National Information Services Inc., and Jack Henry & Associates Inc. are little known outside the banking world, but their infrastructure now makes up much of the modern banking system’s financial plumbing, especially for smaller banks. They provide the technology behind everything from keeping track of customer deposits to powering mobile apps.
Discontent is starting to simmer at the small banks that most depend on them. Smaller lenders and some industry groups say the service providers’ onerous contracts and sometimes mediocre digital offerings have made it harder to keep up with big competitors.
With close to 5000 banks in USA and with most of them not being able to afford latest technology, there is a real opportunity in this space, in terms offering a more modern and easy way of banking. The rise of challenger banks or Neo banks is proof of this fact. They differentiate themselves from incumbents by offering state of the art tech. Some operate as full blown banks with banking licenses like Revolut and some partner with existing banks like Chime. With the popularity of these companies, the idea to buy a company instead of building its own stack must have crossed Google’s mind. But the company has went the self build route. The reasons could be many.
Challenger banks have risen to popularity mostly in Europe partly because of favorable regulations from the Government. Google maybe wary of acquiring a company with banking licenses in Europe.
We are still in early stages of this new kind of shakedown in the banking industry. Google might believe that they can capture a significant market share even if they are not the first movers since building the technology itself may not be a big or time consuming deal for the company.
Google is trying to integrate more deeply with banks in terms of what it can offer customers and want to be in control in terms of what it can and cannot do with banking technology.
The third point is where Google is also trying to innovate and keep its options open in terms of what else it can do with banking. Besides retail banking, infrastructure in other aspects of banking is pretty old as well and has not become open for innovation (or not to the level everyone expects it to be). As explained in this analysis by a16z
This same monumental change—infrastructure “as a service”—is coming to financial services. And it’s not just one company, it’s multiple companies, because financial services infrastructure is so complex. This transformation will reduce the cost and complexity to become a financial services company, and importantly, it will unleash thousands of experiments that will pave the way for the future of banking.
The above analysis explicitly points out how the banking tech infrastructure will become more open over time. Google may want to provide its own tech stack which can be used by developers, though its still too early to double down on what the plan is. They’ll probably cross the bridge once they get there.
Apple vs Google
And then there’s a little old school rivalry in the mix. With the growth of smartphones reaching a plateau especially in USA, for both the companies, its more about preventing loss of users instead of finding new ones. As reported in this survey -
“iOS and Android compete more aggressively as the number of first-time smartphone buyers shrinks,” continued Levin. “With fewer users of the legacy smartphone operating systems, basic phone owners, and first-time mobile phone buyers, Android and iOS now mostly gain and lose users to the other operating system.”
As such, feature parity between two platforms is as important for Google as it is for Apple. Apple released its credit card partnering with Goldman Sachs to offers its users a much better way to track their spend and activity, right from within the iPhone. The most evident thing from this launch is how they are trying to make sure users are locked into the ecosystem of iPhone. From this article -
Apple Card is a new cash-rewards credit card that — Apple purports — is designed to be simple and transparent. But it’s also aimed at keeping you locked into your iPhone.
There are no paper statements with the digital-first Apple Card. Unlike a traditional credit card, everything is accessed through the Wallet app on the iPhone, including transaction histories, total balances, previous statements, and payments. There’s no website to view the latest transactions made on the card or make a payment if you lose access to that Wallet app.
Google, on the other hand, is probably trying to kill two birds with one stone. With a checking account, Google is trying to gain insights into the financial life of a user and at the same time provide a more smart way of accessing bank account directly from their smartphone (similar to Apple). The former fits with Google’s ambient computing mission which as discussed above requires Google to understand and improve as many pressing needs of a user as possible. A checking account offers many more touch-points into the financial life of a user compared to a credit card. People have their salaries deposited into account, do transfers to multiple third parties, automatic payments setup, government stimulus plans etc. On the other hand, credit cards are mostly used for online or offline purchases and collection/redemption of reward points. The other important factor that could have played a key role is the fact that bank accounts are more universal compared to credit cards. For instance in a country like India where Google’s NBU effort is focused towards, the credit card usage is meager 3% compared to 80% for bank accounts. Coupled with the fact that Android has majority of market share in India, it might have played a major role. But there’s no reason why Google would not start offering credit cards as well over time just to keep Android users in US happy and be at par with Apple.
The flip side of this effort from Google is the fact that people may perceive this as one more level of encroachment in personal life by big tech. With privacy awareness and concerns around it growing, Google would have to position themselves very carefully. The company would also try to use its size and offer incentives or higher interest rates which are at an all time low.
Banking technology is a complex space and with the likes of Google/Apple entering it, plus the fact that Covid has accelerated adoption of online services, we may see lot of activity and innovation in the coming few years. But because of the complexity, large number of government regulations (which vary from country to country) and because of the simple fact that its people’s money we are talking about here; it could be a dynamic and convoluted process that could be hard to predict from the get go.
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