Neobanks and traditional banks: Heading towards a marriage of convenience to counter Big Tech? 🤝

A significant majority of French people now use only their electronic Apple card, from their cell phone, to pay for purchases in stores and on the Web. When it comes to investing their deposits, many turn to the products offered by Facebook and Google Financial Services, which are not only among the highest-earning vehicles on the market but also offer attractive commercial benefits. Then, to monitor bank accounts opened in different institutions, most of these consumers have become accustomed to logging into their Amazon Bank customer interface, where they are offered an aggregated view of their cash flow. 

Big Tech's offensive 📱

Pure fiction or a window into tomorrow’s banking world? There is room for doubt. While traditional banks remain by far the preferred partner of most people who use financial services in France and in Europe, GAFAM (Google, Apple, Facebook, Amazon, Microsoft), and to a lesser extent BATX (Baidu, Alibaba, Tencent, and Xiaomi), whose presence is still mainly limited to Asia, have indeed mounted significant offensives in recent years in the banking sector. Apple emerged as a major player in contactless payment in the mid-2010s by launching Apple Pay. It has also recently launched a physical payment card. For its part, Amazon has begun to provide loans to SMEs that use its platform. The e-commerce giant has also developed checking account offers, like Google. For their part, Alibaba (Alipay) and Tencent (We Chat) offer various financial products in China, including checking accounts and insurance. And this list is not exhaustive.

Of course, these initiatives are often part of partnerships with banks: Apple is forging collaborations in every country in order to deploy Apple Pay. Goldman Sachs designed its payment card. Google is working together with Citi, Amazon with JP Morgan, and so on. The risk that banks might lose control over the distribution of financial services to the detriment of Big Tech is real. Big Tech seamlessly integrates financial services into their user experience, and there is nothing to say that Big Tech won’t go solo or seek to expand their range of financial services in a few years. In an opinion published last April by the French Competition Authority regarding the sector dealing with new technologies applied to payment activities, the Authority noted that “without having the experience of banks in the payment sector, Big Tech will master, or even control, certain innovative technologies that could, in the future, play a decisive role in the service chain. There is, therefore, a risk that traditional banks might find themselves confined to executing tasks involving significant fixed costs (regulatory charges, physical network, payment infrastructures) while being marginalized in the value distribution chain.”

International organizations' concern 

The world’s highest authorities also share this fear. Last June, an official of the International Monetary Fund (IMF) pointed out that banks were already dependent on Big Tech services in some areas, particularly IT. Referring to a survey conducted by the Bank of England, he reported that 52 percent of cloud services used by UK financial institutions were provided by two Big Tech companies and more than two-thirds by four Big Tech companies. As such, a failure of one of them would have serious repercussions for the banking business, making Amazon, Microsoft, and others de facto “too-big-to-fail.” In France, for example, BNP Paribas has signed an IT services agreement with IBM regarding a private cloud.

The Bank for International Settlements is even more alarmist. In separate reports released in 2019 and early 2021, it warns that the Big Tech companies are likely to quickly become financial players of systematic importance, well beyond the IT-sphere. Their strengths: a great capacity for innovation on human, technical and financial levels. The IMF points out that while the world’s largest bank, JP Morgan, invests $11 billion in R&D, Amazon spends $20 billion. Big Tech also has a clear ability to attract large numbers of users due to their reputation and marketing strength. These are all assets that could allow Big Tech to eclipse traditional banks in certain business areas eventually. In this scenario, traditional banks’ loss of revenue would be substantial, with the specialized firm McKinsey predicting a drop in their overall profits of between 20% and 60% between 2020 and 2025.

The banks' response 🏦

Based on the above, is the fate of banks sealed? Not necessarily. While it seems inevitable that their market share, and consequently their revenues, will suffer from this emerging competition, they have benefited from a barrier to entry until now. Given the heavy regulatory constraints associated with obtaining a banking license, few non-bank players are willing to take the plunge. That’s why they are now key players in the industry. Above all, most of them, aware of the extent of the threat posed by Big Tech, have marshaled several billion euros over the past few years to build a credible digital strategy. In addition to investments to modernize their IT interfaces, the major banking groups have all increased the resources allocated to their online bank or have developed one, generally with convincing results. For My French Bank, its neobank created in 2018, La Banque Postale has, for example, recently revised its commercial ambitions upwards due to faster than expected customer acquisition. 

At the same time, banks have been working to engage with players who can help them compete with Big Tech: fintech companies. Because of their greater agility and capacity for innovation, these “digital natives” are destined to deliver multiple benefits: cutting-edge technologies, innovative services at a lower cost, an improved customer experience, and so on. To achieve their goals, many banking institutions have set up incubators or accelerators (FinTech Boost for BNP Paribas, Le Swave for Société Générale, Le Village by CA for Crédit Agricole, BIG Factory for Natixis, Platform 58 for La Banque Postale, and so on.). At the same time, all of them have entered into commercial and/or capital partnerships or even buyouts with fintech companies. In France, there are many examples: BNP Paribas and Société Générale have acquired neobanks Nickel and Shine, respectively. Crédit Agricole has become a majority shareholder in Linxo (budget management). BPCE has followed suit with the three fintech companies offering payment services: S-Money, Dalenys, and PayPlug. Crédit Mutuel has acquired Budget Insight (API development) and Pumpkin (peer-to-peer payment and account management). Considered a fintech company itself, Orange Bank got its hands on neobank Anytime in early 2021.

A win-win strategy for banks and neobanks? 🤝

For banks, such operations should facilitate the conquest of new customer profiles, including young people, entrepreneurs, and VSE-SME managers. That is, exactly the users most likely to be attracted to Big Tech’s financial services. For neobanks and, more broadly, for fintech companies, such mergers are also often a matter of survival. As a recent study of the Prudential Control and Resolution Authority (Autorité de Contrôle Prudentiel et de Résolution) mentions, the majority of neobanks are still struggling to be profitable, which automatically hampers their chances of becoming major challengers to international players, whose capitalization reaches tens, even hundreds, of billions of euros. As for fintech companies, many of them indeed manage to generate profits, especially in the area of payments, but their relatively modest financial resources—with the exception, for example, of Adyen and Revolut—tend to restrict their development capabilities. Faced with these obstacles, joining forces with an established banking group can provide access to more financial resources and a larger prospect base while guaranteeing credibility to the outside world.

However, the success of these unions is not guaranteed, as shown by the misfortune experienced by BPCE. Last year, the mutual bank was forced to sell the German neobank Fidor at a loss, which it never managed to integrate after its takeover in 2016. This is far from an isolated case. Indeed, according to Capgemini’s World Fintech Report 2020, 70% of fintech company executives report cultural or organizational differences with their banking partners. Thus, out of 60 banks studied, only three were able to maintain a relationship that met the expectations of all parties! To avoid divorce, concessions by the married couple are inevitable. With the Big Tech sword of Damocles hanging over them, traditional banks have everything to gain, as do fintech companies as well.

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