Which sector wields more power, big banks or big tech?
Big banks control the money. And money is power.
But big tech controls information. And knowledge is power.
In the past controlling money was the surest route to power.
I’m sure you’ve heard the quote, usually attributed to one of the Rothschilds: “Permit me to issue and control the money of a nation, and I care not who makes its laws.”
And there’s no denying that the big banks are pretty much untouchable. If the sector ever gets into serious trouble, it gets bailed out by the government, as we have seen in countries all around the world.
Banking institutions are simply “too big to fail.”
But money is changing. Actually it already has. 90% of the world’s money is now purely digital.
From Future Agenda:
The sum total of money (M2) in the world is about $60 trillion of which c. 1/10th is held as coins or bank notes. The remaining 90% is held as digital money on computers servers; the vast majority of transactions by value are executed by moving electronic data from one computer file to another without any exchange of physical cash.
The banks may have run the game when money moved around the physical world, but every single day more is done digitally and less is done physically.
The world runs on money, but monetary systems now run on technology. And who builds and understands that technology? Not the banks, but big tech.
Big tech built this brave new world, and now it wants its piece of the pie. Actually, it doesn’t just want a piece. It wants the whole thing.
As I said in my opening, big tech has all the knowledge. And knowledge is power. Especially when it comes to creating financial products.
Thanks to big tech’s unrelenting data slurping, it now knows more about our habits, hopes and dreams than we do ourselves.
Big tech is coming for the banks
And big tech has been busy building relationships with customers since its inception.
Here’s CNN money’s take:
Big Tech’s experiment with finance is aimed at deepening relationships with customers — especially younger ones — making it less likely they’ll go through the hassle of taking their business elsewhere.
“There has been a clear shift, with much more aggression into the banking space,” said Daniel Ives, chief strategy officer at research firm GBH Insights.
“Technology companies are trying to get further entrenched in the consumer lifestyle,” he said.
At the same time, delving into finance can give tech firms valuable insight into what Americans are spending money on. That information can then be used to shape future business strategies and defend against threats.
“The lure is the data. It gives them a broader view of their customers’ wallet,” said Ben Elliott, Bloomberg Intelligence’s Washington policy analyst for financials.
As you can see in the excerpt above, big tech is now “aggressively” moving into the financial sector.
And, as I’m sure you can imagine, it has the banking sector scared. The main thing banks have in their favour is regulations.
Big tech is notorious for disrupting and completely reshaping every industry it touches. From music, to film and TV to retail to transport. But it has tended to do so by flouting regulations and rewriting the rulebook.
Will it be able to do the same with the financial sector?
Perhaps, but it’s going to be much more difficult. Financial regulations are notoriously stringent. And the big banks want to ensure that big tech has to play by their rules.
In its most detailed report on the impact of what it called “BigTech,” the Financial Stability Board said the disruption could introduce new risks into the system by compelling banks to loosen lending standards and take on greater risk.
The FSB, which comprises the G-20’s central banks and supervisors, said companies such as Alibaba Group Holding Ltd., Apple Inc., Amazon.com Inc. and Tencent Holdings Ltd. could exploit their troves of data and massive customer bases to quickly expand their payments and wealth-management businesses. The competitive threat to banks is compounded because these well-capitalized firms are already at the forefront of technology—artificial intelligence and machine learning—that financial firms just now developing.
The report reflects the views of major bank lobbies, which have called on regulators particularly in Brussels to make sure technology firms face the same restrictions as financial firms do. A group of executives led by Paul Achleitner, Deutsche Bank AG’s supervisory board chairman, and Denis Duverne, the Axa SA chairman, said last year that traditional banks are at a disadvantage because regulations force banks to share data about their customers with technology firms.
This all came to a head a couple of weeks ago when Apple announced it was moving into finance with the launch of the Apple credit card.
On March 25, Apple announced a partnership with Goldman Sachs and Mastercard (MA) to deliver the Apple Card. The new credit card is designed to work seamlessly with the Apple Wallet, and includes plenty of perks, including cash back rewards without annual, late, or international fees. Analysts have already weighed in on a “modest win” for Mastercard, although Goldman Sachs’ own analysts (in a display independence) don’t think the new services will be enough to replace falling iPhone profits (although others are more optimistic).
The reason Barron’s mentions Goldman Sachs’ take is because Apple has partnered with Goldman Sachs in order to launch the card.
You have to wonder if this was something Goldman Sachs did eagerly or grudgingly.
The great vampire squid had met its match
Goldman Sachs is used to being the bigger fish. Rolling Stone famously said of it in a 2010 article:
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
But even the great Goldman Sachs is nothing more than plankton to the behemoth that is Apple.
Goldman Sachs is valued at $78.5 billion. Apple is worth more than ten times that.
In August last year Apple was the first company to ever reach a $1 trillion market cap. And it’s currently valued around $926 billion.
And Apple isn’t the only big tech player to start gunning for the big banks.
Amazon, also multiple times bigger than Goldman Sachs, is expected to launch a banking product in the coming months (it already has a credit card).
Amazon has built an excellent position for expanding into financial services. A new survey of 6,000 U.S. consumers, by Bain & Company in collaboration with Research Now, shows why. In the first direct comparison of customer loyalty for Amazon and US banks, consumers give Amazon a Net Promoter Score of 47, significantly higher than the 31 for regional banks on average, or 18 for the national bank average.
The battle for U.S. retail banking customers is intensifying as Amazon is expected to partner with a bank to offer a cobranded, mobile-friendly, checking-account-like product initially targeted to young adults. Amazon has many advantages: a high and rising frequency of purchasing, viewing, and reviewing interactions with customers; a full commercial relationship, including credit cards on file; integration into consumers’ digital devices; a paid membership program with 90%-plus renewal rates and the majority of U.S. households as members; and no major security breaches so far.
And Facebook… well Facebook is circumventing the banks altogether and launching its own cryptocurrency, which will integrate seamlessly with Facebook and WhatsApp.
This will give Facebook’s cryptocurrency an instant customer base of more than 3 billion people. And it will also give it access to customers in developing countries who have no access to the tradition banking system.
As for Google. Well, it’s been pretty quiet on that front. But with Apple, Amazon and Facebook all moving in, it’s surely only a matter of time before Google enters the game.
How do you think this will all play out, and are you happy about big tech taking on the big banks, or would you prefer they just left well alone? Let me know: email@example.com.
A definite pattern that has emerged as big tech has disrupted other industries in the past.
New companies grow out of nothing, and many times they make investors substantial returns.
With great change comes great opportunity.
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If you’re interested in making money investing in world-changing tech, The Exponentialist is a great place to start.
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Until next time,
Editor, Exponential Investor