Traditional banks may be under threat as bigtechs such as Amazon, Apple and Google target the consumer directly. But all is not lost, says macro-economist and professor Arnoud Boot. ‘The public has more trust in the average bank than in the average bigtech.’
For five years, Arnoud Boot has been warning traditional banks that information technology is completely changing the banking landscape. Traditional banks, he says, must rediscover their added value. One of the dangers, alongside shrinking margins, very low interest rates and increasingly stringent regulation, is the rise of bigtechs such as Facebook, Apple and Google which make clever use of AI and machine learning across their platforms.
The Dutch central bank is also concerned. It recently published a report highlighting the way bigtech earns money from platform users by utilising the data they generate to sell targeted advertising, to offer third parties direct sales channels, and to sell products themselves.
The payment patterns generated by online clients contains information about their preferences, on top of all the other personal information these companies have already gleaned. In addition, the central bank noted, purchasing and payment behaviour gives bigtechs information about the credit-worthiness of consumers. In China, this has already led to tech giants like Tencent and Alibaba building up key positions in mobile payments traffic through WeChat Pay and Alipay, and they are increasingly offering new services such as credit and insurance.
Arnoud Boot (59) is professor of Corporate Finance and Financial Markets at the University of Amsterdam. He is also a fellow of the Royal Netherlands Academy of Arts and Sciences, and chairman of the European Finance Association and the Sustainable Finance Lab. Boot was previously chairman of the Bank Council of the Dutch Central Bank and a crown member of the Social Economic Council.
Why do you see the arrival of bigtechs in the financial sector as a threat to traditional banks?
Arnoud Boot: ‘The difference with bigtechs operating in the financial sector, like Amazon, Apple and Google, is that they target consumers directly via their platforms. And these are platforms where all sorts of financial and non-financial services come together. This direct interface forms a threat to the traditional banking model. And banks are also facing difficulties due to PSD2, the European regulation which allows bank clients to decide if they want to allow third parties to access their banking information. Traditional banks can easily lose their clients to these new players and will end slipping into the role of suppliers to the platforms themselves. In this way, the bigtechs are undermining the classic bank and insurance company distribution networks. The big banks were able to consolidate their market positions for years, partly due to mergers and acquisitions.
So this is a strategy that no longer works?
‘It is working less and less. The big banks had close ties with their clients, had their data and could profit from cross-selling products and services. And you could easily invest, save and get a mortgage from the bank where your salary was paid in every month. It was lucrative for the banks, because they could profit from economies of scale and other synergies. And they did not have to be perfect either, because clients tended to remain loyal. But this good relationship is diluting. The consumer can access all sorts of financial service providers via online platforms, and that makes the platforms even more dangerous – products and financial services are being offered together via the same outlet. So you can buy a boat or something else, and if you want to get financing and take out insurance, you’ve got a choice of 60 different providers via the same platform. That classic relationship banks had with their clients has loosened. Today’s customers see their bank as an app and it has become virtually impossible for big banks to cross-sell. They have lost the control they used to have.
‘The public has more trust in the average bank
than in the average bigtech’
Who are the winners?
‘The bigtechs and the specialised players which used to have difficulty competing with banks because they did not have a direct relationship with potential clients. Now via platforms they can. You can see that most clearly on the retail market, where it is swarming with companies offering investments, mortgages and loans, you name it. The market for SMEs is also shifting – take online peer to peer lending, for example. The bar will be raised for all providers on such a platform because every specialist has to compete with other specialists.
Are bigtechs more of a threat than fintechs?
‘Absolutely. The bigtech platforms are an existential threat for the bank-customer relationship. Fintechs offer smart solutions, for instance for managing payment traffic. Banks are closer to them, and they can join in, or even seize the initiative themselves. Take iDeal for example, the digital payment solution set up by Dutch banks. But fintechs can be a threat because they have deep pockets. Look at Adyen’s market capitalisation. Bigtech is a degree or two worse. They have a lot of client information and expertise in information technology – think about building online distribution systems, apps and dealing with big data. Both bigtech and fintechs use all the information that they gather in their back office for marketing. They analyse client information, and get to understand their customers even better. Big banks are only just starting to carry out data analysis. The difference is that bigtechs launch new products on the basis of client needs, whereas traditional banks sell products they’ve already got on the shelf. And then, well, you had better hope the customer needs it.
‘Bigtechs launch new products on the basis of client needs, traditional banks sell products
which they already have on their shelves’
But Dutch banks like ING are already fairly advanced when it comes to digitalisation?
‘Yes, ING is on the right track, but it is not there yet. Most banks have to deal with structurally high costs. A digital bank has far fewer workers. If you started a bank today, I think you could do it with 20% of the staff that a comparable bank has on the payroll. Banks are also relatively bureaucratic and have to deal with old IT infrastructure. Many banks are still using technology from the 1960s, when man first flew to the moon. But they’ve added on all sort of IT systems to patch it up, and you end up with the notorious IT spaghetti. It is an easy criticism, of course. You can’t exactly closed down a bank while you put together a new IT system. But such a situation does not help you in your fight against the bigtechs.
There are concerns about bigtechs combining consumers payment details with other personal information. Is this an advantage to traditional banks?
‘Yes, I think it is. Concerns about privacy breaches, and other compliance issues are an advantage to the big banks because they have had to learn to cope with them already. Stricter regulation will help banks to survive. The public currently has more trust in the average bank than in the average bigtech.
How do you see the role of big banks in the future?
‘Banks have always survived and banks can remain relevant in the world of fintech and bigtech in their role as risk manager and credit monitor. Some banks may manage to set up their own financial ecosystem, comparable to the platforms operated by the bigtechs. In addition, there will always be a need for the bank as trusted advisor for wealthy individuals and companies. But they will need to ensure they retain a relationship based on trust. On top of that, banks will always have a role in big transactions, in M&As and in IPOs. And they are lucky that they are still very much needed within the current monetary system. If central banks want to pump money into the economy, they cannot avoid the traditional banking system.
So on balance?
On balance, there are still enough opportunities for traditional banks. The question is whether or not their leaders are sufficiently aware of them, because they are too busy dealing with increased regulation, the digital revolution, the legacy of aging IT systems and other threats. But they really should be keeping an eye on the opportunities as well.’