Tech giants such as Alibaba, Amazon, Facebook and Google are starting to increasingly shift their core business to other areas of the value chain. Even though financial services currently account for only around 11%1 of the total sales of selected big tech companies, it is obvious that the major players will gradually expand their activities and thus complement their own commercial services to perfection.
Mass meets network
The Big Techs have some considerable advantages in comparison to classic banks and financial institutes: numerous customer data from around the globe which can be evaluated thoroughly using the latest technology such as machine learning and AI. Detailed customer screenings can easily be created from the information obtained. Ant Financial and Mercado Libre state that they consult more than 1,000 series of data per loan application for their credit assessment. But not only the absolute amount of data plays a role in that. The tech giants also benefit from the networking effect by being able to access a wide variety of information from their users.
The data available to the tech giants depends first and foremost on where they are active business-wise. E-commerce platforms are able to make relatively exact statements about the respective (re )payment record of loans using the past money transactions of their users as a reference. Big Techs that focus on social media networks or internet search are capable to use their data in order to assess the users’ individual preferences, which, for instance, might be the basis for corresponding insurance offers. The problem banks have is: They do not have any access to network data at all since for legal reasons alone, money transactions and commerce have to be separated.
In the traditional credit business, banks have to use, evaluate and constantly monitor various types of information for the risk assessment of their customers. As a whole, this is extremely time-consuming and costs money which is usually passed on in form of fees and interest. Big Techs have almost zero additional costs per additional user and their data pool available at existing fixed cost. In this respect, they can calculate with comparatively low average costs and are in a better position than their competition from the banking industry in the medium to long term.
Below the radar
There is another advantage of the Big Techs: They are capable of attracting customer groups worldwide who have not yet had access to the banking system. These customer groups have fallen under the radar of banks since they are too far away geographically and/or because they do not meet the minimum requirements for a loan application – for example due to a lack of audited financial statements. However, since in developing and newly industrialising countries cellphones and smartphones are relatively wide-spread, Big Techs are able to gain customers by offering cashless payments or other financial services. This means: They attend (smaller) companies as well as households that otherwise would not make use of any banking services. The best examples for such a development are payment methods like PayPal and M-Pesa or, as of recently, the online currency Libra.
(Un)controllable market power
The combination of a wide range, special networking effects and low average costs enables Big Techs to radically change the financing sector. Critics, however, advise against the presumable development of digital monopolies which would have market power beyond control. Furthermore, additional costs and risks for society as a whole may emerge. Many demand the divestiture or at least strict regulations of those monopolies. If and how these demands are pursued remains to be determined.
In our opinion, a black-and-white scenario, i.e. a complete change in markets and systems, is not very likely. It is more likely that the financing sector will divide into two sections, one being dominated by Big Techs and the other, as usual, by banking and financial institutions, although to a smaller degree than today. This will probably also include the trade and receivables finance market: Service providers beyond the Big Techs will continue to exist in the future. However, they will be facing a variety of challenges in the upcoming years. We think: Whoever is capable of combining the powerful processing of mass data with maximum adaptability and security, will definitely be winning in the trade and receivables finance sector rather than losing. efcom will accompany their customers as an innovative partner and a practical know-how provider. For further information, anyone interested may contact efcom via firstname.lastname@example.org
1 S&P Capital IQ; BIS
Sources: BIS Annual Report 2019; “Zeigt Big Tech die wettbewerblichen Folterinstrumente auf!“ by Thomas Straubhaar