In a recent post, I highlighted that Tech Giants such as Amazon, Facebook and Google have started to pose a serious threat to high street banks. In a report published by McKinsey it was identified that, Fintechs pose less of a challenge to banks when compared to the likes of Amazon and Google.
While Central Banks’ interest rate hikes are happening across the board, with BoE being the latest to hike interest rates, the ROE for the Banking industry is under serious threat. With Digital firms taking on the banks, ROE might come down from an expected 9.3 % to 5.2%. And this fall could be largely due to Tech giants such as Amazon, Tencent and Alibaba and Rakuten.
Amazon has been expanding its Financial Services to over 20,000 merchants (predominantly Small and Medium Businesses) on its platform. They have lent close to $3 Billion to these businesses so far. Their strategy completely hinges on the amount of high quality information they have on these businesses. This would be a key differentiator for them against smaller Fintech firms, who lack the might (both financial and data) to take on the Banks
Rakuten Ichiba, Japan’s single largest online retail marketplace, provide e-money usable at hundreds of thousands of stores, virtual and real. Rakuten also offer services like credit cards and mortgages to millions of their customers.
Alibaba and Tencent both have already made inroads into the financial services space with their payments capability. Post their massive successes in China, they have also started expanding into EU. All these players hinge their approach on their superior customer experience.
With a massive customer base, a world of data, technology to provide actionable insights on the data and a customer friendly app, these tech giants shouldn’t have much trouble scaling their financial services capabilities, provided they are able to address the regulatory implications in doing so.
Arunkumar Krishnakumar is a Fintech thought leader and an investor.
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