On Christmas Eve, when few people were paying attention to the world of fintech, Google was awarded a European Union e-money licence from the Republic of Ireland.
The agreement followed a similar deal the tech giant had struck with Lithuania’s central bank just a few days earlier.
With the pervasiveness of smartphones, e-money accounts – the digital equivalent to cash – are becoming ever more popular. With its new licence, Google Pay is now one step closer to fulfilling its ambitions to become a leading online payments provider in Europe.
Traditional banks still don’t have the same capability as the tech giants when it comes to mobile payments.
The big credit-card companies and banks are joining forces with the likes of Apple, Samsung and Google to facilitate contactless access for their customers’ cards, but these partnerships mean banks are not monetizing mobile payments and are losing out on substantial business.
But banks are keen to state that the pie is big enough for everyone to enjoy success – that there are so many opportunities in this new digital world that all the actors in the payments space can perform.
“In fact,” said one banker to Euromoney at the beginning of the year, “banks and tech companies are much more likely to collaborate because their businesses complement one another. Banks have the financial knowledge and techs have the data and the reach. It’s a win-win.”
There are a number of examples where banks and tech firms have collaborated for mutual benefit – in the payment sector and beyond – that illustrate the banker’s point.
One of the more recent examples comes from India, where Google Pay has teamed up with a number of private banks to provide loans via smartphones with minimal paperwork.
For the Indian authorities, along with the tech companies offering payment solutions to rural populations, this is a cheaper way to bring the unbanked into the formal financial sphere.
“Don’t forget, there is a lot that banks can do that tech companies don’t have the capacity for,” the banker insisted, referencing certain types of high-street banking services, such as mortgages and savings accounts.
Many of the retail bankers Euromoney spoke to about the subject were keen to emphasize the fact that, as much as they’d like to, tech companies cannot do it all.
But more and more tech firms are now able to provide their customers with loans, payment services and options for savings.
For example, Amazon can lend up to £200,000 to those with an Amazon seller account in the UK. In China, Alibaba has started offering low-interest loans to much of the rural population who are unable to access traditional bank finance.
One European bank told Euromoney that things will only change once they hire a new generation of tech-savvy leaders to drive forward innovation
There are many tech firms that are beginning to offer new, innovative ways to borrow and repay money that bypass the banks entirely.
Tech companies are gaining the upper hand because, firstly, data are a huge part of their arsenal. This allows them to streamline due diligence and saves them time and money.
These are companies that know where we live, who we work for, where we shop and how much we earn. This means they can offer quick loans with competitive interest rates tailored to individual needs.
Of course, banks have access to some data, which they argue will complement that of the tech companies encroaching on their space, but not nearly enough.
Secondly, banks on the high street are closing. According to research by Which?, between 2015 and 2018, 2,900 high-street bank branches were closed.
The banks argue that more people are using banking services online; the argument from their critics is that they are aiming to cut costs as profit margins are being squeezed.
If retail banks aren’t able to give their customers high-street banking solutions in branch – something they believe is their unique selling point – what is stopping their customers from moving to Amazon, Google and Facebook for a wider variety of banking services when they become available?
Indeed, the loyalty that people once felt towards banks is slipping away.
According to the Current Account Switch Service – a free-to-use service in the UK that guides customers to switch current accounts, overdrafts and other banking services – overall switching levels between the July 1, 2017 and June 30, 2018 were up 6% on the previous year.
Some may be changing to other traditional banking systems, but others will be looking at how a more convenient digital service might better suit their needs.
While 6% might not be much to write home about, the signs are notable, especially given that the EU’s revised Payment Services Directive (PSD2) – which allows non-banks to enter the industry – only came into effect a year ago. This will also change as more and more people become aware of PSD2.
According to a poll by YouGov, only one-in-five people have even heard of the term open banking, the UK equivalent of the European PSD2 – but the tech-savvy generation will quickly become aware of the opportunities that this directive will offer them.
Thirdly, legacy systems in the banking sector remain in place, limiting the development and capacity of online and digital services for the banks. One way in which banks can bypass this is by acquiring and investing in fintech and data analytic companies themselves – something many are doing aggressively and often under the radar.
Yet at the same time, tech companies themselves are jostling with the banks to acquire smaller fintechs that can streamline their own business models.
Some of the fintech companies Euromoney has spoken to this year believe they have a much stronger affinity with the large tech forms over antiquated banks. This like-mindedness is attracting fintechs to tech companies and not to the banks.
This is exacerbated by the generation gap emerging between the fintechs and banks. Many banks are unwilling to adapt and are unable to attract Generation Z members that lead the innovations in tech.
By its own admission, one European bank told Euromoney that things will only change once they hire a new generation of tech-savvy leaders to drive forward innovation.
Banks’ relevance is slowly slipping away. It’s not inconceivable that in a few years we will ask Google to pay an electricity bill, Alexa to transfer some money to a savings account and Siri for a loan.