Can E-Money and Traditional Payments Institutions Survive the Onslaught of Big Tech?
…Or Is There an Alternative Route?
Big Tech firms (like Google, Amazon, Facebook and Apple) are eying up the payments space enthusiastically. Anyone who attended Sibos last year would have seen the signs that Big Tech is rapidly moving into the places that E-money Institutions (EMIs) presumed was their fundamental niche. This position will get more competitive! These firms are likely to have a big impact on payments. They have put their brands foremost and are using payments to boost on-platform engagement and commerce, reinforcing their importance in consumers’ lives.
Facebook bears watching. It’s starting to roll out Facebook Pay to 2 billion WhatsApp users and ongoing discussion in preparation to launch Libra, which could shake up the reigning payments ecosystem.
Partnering with complementary platforms can reap the rewards. Facebook invested $5.7 billion in Jio Platforms, whose Jio subsidiary has 400 million mobile-phone users, JioMart serving millions of SMEs, and Jio Payments Bank. Google also invested in Jio ($4.5 billion) and will collaborate on low-cost mobile phones.
According to the European Banking Authority’s (EBA’s) own recent survey, more than 85% of institutions expect BigTech firms to participate more actively in the EU payments market and EMI sector by integrating these types of services onto their existing platforms. The arrival of BigTech firms is again likely to change the way Payments Institutions (PIs) and EMIs approach their businesses. customer data will become ever more important, as will the notion of fostering customer loyalty, something that the BigTechs enjoy in abundance.
Threats and Challenges to the Future of EMIs and PIs
The EBA highlights the following threats:
- The impact of BigTech firms: The potential use of customer data, currently held by Big Tech firms, may give them a huge competitive advantage over PIs and EMIs
- Brexit: Large volumes of payments business is offered by UK-based institutions through their cross-border passporting activities. This sector of the market is likely to face major disruption as the UK, from a financial services perspective, has crashed out of the Eurozone.
- The dependency of PIs and EMIs on banks: PIs and EMIs reported a dependency on agency banks in their providing services to customers, with no immediate alternative in the offing.
In addition to the threats to the market outlined above, the EBA also listed out the following challenges that wider banking industry needs to overcome in order to ensure continued growth:
- Operational resilience and IT security
- Operational capacity to cope with increasing volumes
- The rapidly evolving regulatory frameworks
- Customer education (ensuring that consumers are aware of what new technology is currently being deployed to do on their behalf)
- The difficulty in acquiring, retaining and training talented people (particularly in regards to ICT and digital skills).
The full report can be accessed here.
So while many people just cannot stop their Amazon habits, others are beginning to see the benefits of payments through the Big Tech giants.
However, Before They Arrive, We Will All Need to Ponder the Following:
The entry of large technology firms into financial services holds the promise of efficiency gains. Regulators need to attempt to ensure a level playing field between big techs and PIs & EMIs. This will have to consider these company’s vast customer base, access to information and broad business models. Big techs’ entry presents new and complex challenges of ensuring financial stability, regulating unfair competition and multiple data protection issues.
The impact on customer choice should be carefully followed, whilst big tech brings scale it often brings uniformity, what should not be lost is the specialism that EMIs and PIs bring to their geography and to their specialist business sector. This specialism is important across the economy and for customer choice.
What does this mean for EMI and PIs? It may look like a hostile situation of multiple challengers and big competitors, but EMIs and PIs need to adapt a different mindset.