In 10 years from now – or even less – it will be technology companies, not financial institutions, dictating terms of service for customers in banking and finance, according to a high profile corporate law professor.
While banks hold the power today, we’re in the midst of a major shift, which promises to change everything, says Dirk Zetsche, a professor and director for the Center for Business & Corporate Law, Faculty of Law, Heinrich Heine University Duesseldorf.
After all, individuals now seem comfortable to receive and trust news as it appears in their Facebook feeds without any intermediation from a media source. It’s only natural that this trust will be extended to financial transactions, loans and investment products, too.
“We believe the tech firms have the true power, because more or less whatever data is sent to the bank will determine whether there is credit or a service provided to a customer,” says Zetsche, who is also chair of Financial Law at the University of Luxembourg.
Zetsche recently co-authored a paper on the topic, raising the issue of whether banks or technology companies will be holding the most power and will ultimately represent the biggest systemic risks to our society in the not-too-distant future.
Zetsche’s point is that big data, rather than big balance sheets, will be more decisive in the battle for customer relationships in this new technology-driven world.
“Technology companies have become extremely large and extremely powerful. There are certain banks in Europe which entirely depend on one or two platforms to channel customers from. If this is happening, the bank starts depending on the tech firms rather than the other way around,” Zetsche says.
Zetsche describes a new term coined in his co-authored paper “techfin” (as distinct from fintech) in which banks rely on technology companies to do business.
Among them, Google, Facebook, Amazon: in all there are around 10 to 12 companies in this category around the world through which most other companies are reaching customers, Zetsche says, speaking to as room full of financial services professionals in Sydney in a lecture hosted by law firm King & Wood Mallesons.
In Australia, the battle lines are being drawn: hardware company Apple is tangling horns with the banks here, using its leverage with consumers to muscle into the fast growing payments market.
At the end of March, the competition regulator here rejected a request by the banks to form a bloc that would have given them negotiating power to wriggle in through Apple’s technology with the hope of reaching the end consumer.
While plenty has been written about the disruption that giant US platform Amazon will likely create in the retail business here when it starts opening warehouses and distribution, little has been said about the potential disruptive impact of its significant lending business to SMEs.
Amazon Lending has been providing loans to small businesses selling product through its online marketplace in the US and in Japan for five years and has recently expanded its business in the UK where it’s challenging other startup lending businesses providing working capital to companies to small businesses.
ASIC chair Greg Medcraft’s comments in the media at the start of this week declaring “the crowd will destroy banking models” shows the securities regulator is on the same page as Zetsche, his colleagues, and most other learned watchers of this space around the world.
Data innovation is different
At the very heart of both the techfin and fintech propositions is data, something highlighted in this recent InFinance article.
“Whatever you look at, data analytics is the key – everything comes from it,” Zetsche describes.
Currently, fintech innovation is driven by startups looking to solve a “pain point” in the banking process – they’re looking to create a solution to a problem that exists, Zetsche describes.
However, innovation in a true data driven world will be different, Zetsche remarks.
Rather than look for a pain point in the customer experience, technology companies are gathering data and looking for opportunities, Zetsche explains.
“They’re finding different access points for products this way,” he says.
Tech leading fin
While banks are themselves building technology and capturing data, it’s the technology companies and platforms that are out in front in the big data movement, Zetsche outlines.
For example, while investment funds might previously have paid platform providers “shelf space” fees to be listed high on a menu amongst other investment funds, it is now search engine Google that determines the visibility of a fund when individuals search the Internet.
Meanwhile, Amazon will happily offer credit to small and medium sized enterprises as a part of a premium service when tied in with their transaction activities, an area traditional banks see as too risky.
But, these examples are just the tip of the iceberg in terms of the power that technology companies will ultimately wield in banking, Zetsche notes.
“What we are doing now is really creating a shadow banking system on the front end of financial services. This shadow banking is a threat to the existing players and the customers,” Zetsche comments.
Who’s systemically important now?
To date, regulators and governments have been egging fintech innovation on – governments see innovation and technology as a pathway to efficiency, economic growth, and ultimately, a better deal for consumers.
In Australia, ASIC’s regulatory sandbox concept and public policy efforts including the innovation initiatives such as Innovation and Science Australia have cheered on the development of the industry here.
Last week Rod Sims, the Australian Competition and Consumer Commission head, went as far as saying that fintech’s rise is not threatening the banking industry enough. He was speaking during a recent talk fest in Sydney, highlighting the government’s preference for relying on innovation to combat the concentration of power in the banking system.
Regulators might be changing the way they monitor and enforce the rules in banking – agencies have been big on talking about incorporating artificial intelligence and big data.
Regtech (regulation technology) is another area where fintech capital is increasingly being put to work.
But regulators could have their hands full in this new word where it’s the technology companies – rather than the financial institutions – emerging as the most systemically important to society overall, Zetsche reckons.
“When the technology companies get too big to ignore, we might want to empower the regulators to review the data set and the algos [algorithms],” Zetsche comments.
While tech companies neither take on client assets nor solicit in the traditional way financial institutions do, Zetsche argues they can be systemic in a different way.
“They’re not fiduciaries and they don’t have the obligation to consider the client’s interests when they make decisions,” he says.
He argues that erosion of civil society could be what’s at stake when unlawful tech companies see data correlations at any cost.
Systemically important in terms of data could become as imperative as systemically important in the banking system, Zetsche says.
“We might need to invent new data points to measure the systemic influence – it might be that control of 5 per cent of the entire population’s data might be “too connected to fail”, Zetsche muses.