Slowly but surely, the world’s biggest internet companies have begun to manage larger parts of our lives. Need to collaborate on a project? Google Suite is your go-to service. Need to find an apartment? Check out Facebook‘s marketplace.
However, Facebook’s intention to fund and help build its own cryptocurrency has sparked discussions across the international financial community about whether tech companies are quietly taking over the functions of banking institutions.
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“We cannot accept private companies issuing their own currencies without democratic control,” said Finance Minister Bruno Le Maire of France during a meeting of the Group of Seven finance ministers last week, where Facebook’s cryptocurrency project, called Libra, was top of mind.
Le Maire’s comments touch on a much larger discussion. The International Monetary Fund (IMF) warned in a paper released last week that, if big tech seamlessly begins performing the services once delivered by financial institutions, banks could be “left behind.”
The report outlines three potential scenarios for the relationship between big tech and commercial banks; coexistence, complementarity and takeover.
“Takeover” is listed at the least likely scenario, and a “contingency worth considering to better prepare for, and attempt to shape, the future.”
While initial competition to banks came in the form of financial technology or “fintech” startups, Dan Murphy of the Milken Institute Center for Financial Markets said in a paper that “big tech’s strategy is to quietly seize the customer relationship one product at a time by offering a seamless digital financial services experience tied to their core platforms.”
There are several examples of this beyond Facebook’s crypto ambitions. In 2015, Amazon began offering business loans to its sellers in China, and Apple has gradually turned its Apple Pay product into a leader in mobile payments.
In 2014, Alibaba consolidated a number of its financial services — including its payment platform Alipay — under the umbrella of Ant Financial, which offers almost every financial service that the average customer needs, including deposit accounts, credit and wealth management, Murphy wrote.
While Canadian banks haven’t seen much in the way of threats from major tech companies yet, the tech sector has successfully penetrated the investing sector with a plethora of assistive apps and digital services.
The question remains, is banking the next in a long line of services to be swallowed by big tech — and so — is this a good thing or a bad thing?
What could this mean for citizens?
What does a world where, for example, both Amazon and the Royal Bank of Canada are competing to issue you a business loan look like?
The answer is more competition.
Dave Valliere, a professor at Ryerson University’s Ted Rogers School of Business, said that the disruption of banking by big tech “would have the silver lining of more competition and innovation in the sector.”
According to the IMF, banks will be forced to double down on services they can provide that tech firms can’t, such as offering higher interest rates on savings accounts, along with acquiring promising fintech startups to help them compete.
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Andreas Park, an economist with the University of Toronto, said that beyond competition, there may be an opportunity for banks to partner with big tech companies to improve their customer service.
“Banks are not very good at all at innovating and at providing customer service,” Park explained.
“So, I think there is a huge opportunity for business and commerce to reduce costs and reduce friction.”
Park said that while banks are very good at “banking things,” such as issuing large loans, liquidity transformation, risk intermediation, etc., he sees an opportunity for banks to partner with big tech to help them innovate and provide a better user experience for customers.
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Another potential result of this development is greater financial inclusion.
According to a joint report by the World Bank and the People’s Bank of China, the growth of digital financial services in China has made banking services accessible to consumers in remote locations, has allowed for more affordable products and has increased competition among financial services in the region. Similar success stories can be found in Africa.
However, Patrick Leblond, a professor of international economics at the University of Ottawa, isn’t convinced big tech will be keen to uphold the regulatory and reporting standards that come with being a registered bank.
“If they start really operating like a bank or any anyone offering financial services and all that, they will have to get a licence and have the regulation and the reporting that goes with it, and it’s not clear that that’s going to offer the same level of profitability,” he said.
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Gaining control of the banking system has little to do with technology, several experts argue. It has to do with trust.
“Anybody can write software,” said Valliere. “You could just keep your money under a mattress. But you give it to the bank for the convenience of knowing that you can trust them.”
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This sentiment is echoed by Leblond and Park.
Leblond adds that the big tech companies have faced a number of issues with trust in the past. While consumers may have been able to forgive these transgressions when it comes to something intangible like data, they may be warier when it comes to their hard-earned dollars.
“We know with Facebook, for example, there have been breaches of trust especially on the privacy side. So, what are the guarantees that they would be able to provide the same kind of trust on the financial services side at the same time?” Leblond said.
Furthermore, Park adds that there is a legal difference between a company that provides financial services and a banking institution that can federally insure monetary deposits. The licence to accept and hold money for citizens, where that deposit is federally insured, is one afforded only to registered banks.
Canada has a centrally regulated banking system with a focus on stability. The Bank Act is the principal federal legislation governing all aspects of banking. It requires banking institutions to be “widely held” by the public, meaning no one owner holds more than 10 per cent of shares.
Under this legislation, the Canadian Deposit Insurance Corporation automatically insures deposits made to savings and chequing accounts held by registered Canadian banks up to $100,000, should a banking institution fail.
How are the banks responding?
Valliere said that Canadian banks are “actually pretty good at getting on top of technology,” as opposed to other banking systems around the world.
Mathieu Labrèche of the Canadian Banking Association noted that Canada’s six largest banks have spent more than $84 billion on improving their digital interfaces over the past decade. Payments Canada and the Bank of Canada are leading payments modernization to compete with players like Apple Pay and Alipay.
Furthermore, Labrèche said that recent updates to Canada’s Bank Act allows banks to innovate and “leverage their expertise,” as well as invest in or make referrals to fintech companies.
The IMF stated in its report that banks have other advantages over major tech companies as well, such as the ability to raise interest rates on deposits.
The centralized nature of the Canadian banking system is unique and could prove an additional obstacle to big tech companies looking to establish a banking presence in the country.
Brett Pitts, the Chief Digital Officer with the Bank of Montreal, told Global News in a statement that the banking sector is moving quickly to respond to the growing demand for digital services.
“For the 20 years I’ve been in the digital banking space, we’ve heard musings about the possibility of banks being left behind in response to technology changes. What is often missing from those analyses is a full understanding of the pace at which the banking sector is evolving its own technologies and offerings in payments and financial services.”
He adds that the IMF report predicts that coexistence or compliementarity are the two most likely scenarios for the future relationship between banking and technology. He emphasizes however, that banks guarantee stability where the tech sector can’t.
“We have decades of experience effectively competing with new entrants to not only meet customer expectations for convenience and speed, but also doing so in ways that give customers confidence that we are effectively managing risk and meeting regulatory expectations for stability,” the statement continued.
While experts deem it unlikely that big tech could ever drive the current banking model to complete extinction, the IMF has urged world leaders to “seek the answers to these questions,” before they’re forced to find out.
— With a file from Reuters