A recent report from Reuters states that Banks and other asset management companies may be in trouble as firms such as Amazon and Walmart are launching the provision of their own financial services.
The main one of these services included is the ability for customers to pay using credit.
These brands such as Amazon, Walmart, and Mercedes are doing this to cut out banks, the middleman, from as many financial transactions as possible, thus enabling these firms to buy out smaller tech startups to expand their product ranges into offering customers banking, credit, and even insurance. Consequently, this places traditional banks at risk of becoming obsolete as when these firms expand into financial services, they are bound to take market share from their traditional counterparts. This is because consumers may prefer to use Amazon’s or Walmarts services compared to ones of the bank for convenience sake, for example, Amazon lets its customers buy now and pay later once their product is checked out, at the same time, Mercedes drivers can get their cars to pay for their fuel.
At the same time, firms like Amazon may have a competitive edge over financial institutions as the sheer amount of data these firms have relating to consumer buying habits can help them cater credit deals towards each customer to provide a higher quality product and service. "Embedded financial services take the cross-sell concept to new heights. It's predicated on a deep software-based ongoing data relationship with the consumer and business," said Matt Harris, a partner at investor Bain Capital Ventures. (Reuters)
Data from Reuters shows that Investment into “Embedded Finance,” which is what these tech firms are doing, has grown from a value of $89 million in 2016 to over $4 billion in 2021. This $4 billion investment into embedded finance comes from a $1.5 billion in 2020, meaning that one, this venture is very new and innovative for tech firms, and two, the development of this technology has been accelerated by the pandemic as consumers have switched to more online-based shopping methods.
However, traditional financial institutions won’t just let these tech firms take away their market share without a fight. At the moment, Reuters reports that banks and traditional institutions are still behind compared to these innovative firms, meaning that if they do not ramp up their efforts in innovating their products they will continue to fall behind relatively.
Banks such as Goldman Sachs and JPMorgan are already working hard to ensure that they do not lose their position in the market. For example, Citigroup has teamed up with Google on bank accounts, at the same time, Goldman Sachs is working with Apple to provide credit cars and JPMorgan is purchasing 75% of Volkswagens payment business with further plans to expand to other industries, Reuters reports.
This will put the Banks in a much more aggressive position as they look to secure deals with Tech companies before these companies manage to develop their own financial infrastructure. This means that, for the time being, it is cheaper in the short term for these Tech companies to secure deals with large banks to provide these financial services, rather than attempting to build them from scratch. For example, although Amazon Credit Cards can be found on Amazon, they are actually provided by a firm known as Stripe, which is valued at $95 billion in March.
This is because it is much more efficient for a firm to partner with another firm as it enables both companies to specialise by focusing on a narrow range of goods and services. Overall, tech companies are making a play to eat into the marketing share of financial firms, nevertheless, this will be a tough nut to crack as firms such as JPMorgan, who have a consumer and community loan book worth $435 billion as of June, do have the funding to bite back.
Written by Hubert Kucharski