With concerns of a BigTech “invasion” into financing reaching an apex, it seems appropriate to examine BigTechs’ interest in the financial sector:
- Why might BigTechs get into banking? – financial services already make up about 11% of BigTech revenue streams. Moreover, there is great potential for this to grow in the future, presenting them with an enticing motive to develop more financial products and services.
- Do BigTechs have an advantage? – BigTechs have become adept at collecting and using the right data, although this data is sometimes less reliable than is ideal for forecasting. BigTechs also have significant networks (via their non-financial-related activities) that they can use to reach consumers; however, they must still be able to build financial relationships and trust as well as overcome key issues such as a lack of regulatory and risk management experience and expertise.
- Do established financial institutions have an advantage? – established financial institutions have an advantage over BigTechs in terms of having more access to verified and reliable consumer data that comes from years of relationship-building. They also have already developed a wide range of financial products and services based on those relationships as well as a wealth of experience in dealing with regulations and risk management. Additionally, established financial institutions have access to large and relatively cheap funding sources.
At their hearts, BigTechs are not financial institutions; moreover, most are not sufficiently-incentivized to completely cut financial institutions out of lending or deposit-taking. Moreover, BigTechs can find profit in helping financial institutions underwrite, process and even service loans. So while BigTechs may have an interest in the financial sector, it seems unlikely that a full-scale invasion will involve massive offensives against established financial institutions. Rather, it is more likely that they will offer some (probably relatively limited/specific) financial products and services and work with established financial institutions.