Legacy institutions are facing pressure from all sides

Efma feature

18 November 2019

As financial offerings from tech giants proliferate, traditional retail banks are being forced to adapt.


Facebook. Amazon. Apple. Uber. And now Google. The list of big tech challengers to traditional financial institutions only continues to grow. Last week, Google announced their intention to continue their expansion into financial services with a project called “Cache” that will offer current accounts in coordination with Stanford Federal Credit Union and Citigroup.  

Google’s announcement comes on the heels of a report from BIS’s annual Red Book report on payments and financial infrastructures. The report showed the continued growth in share of payments from non-traditional players. In the past five years, the share of payments of non-traditional financial institutions has risen from 14% to 25%. This growth highlights the increased pressure on banks.

Incumbents are feeling the pressure from two different angles. First, there are neobanks and challenger banks that have cropped up in both Europe and America. N26 from Germany, Revolut and Monzo from the UK, and Chime from America, along with many others, have garnered a lot of attention. Their customer base growth is considerable and they all have designs on continued global expansion.

But pressure is also coming from non-bank players that are eager to capitalize on their massive user base. Tech giants want to play a bigger role in consumers’ wallets. This has been a long-held ambition but recent initiatives have demonstrated a much bigger focus on this aspect of their business.

Facebook is attempting to launch a global currency. They just announced Facebook Pay which provides users with payment services across their brands. Apple launched their first credit card this summer. Amazon Pay now allows its customers to pay their utility bills directly. Uber has relaunched their credit card and is rolling out current accounts and debit cards for users of the app. And now Google is furthering its efforts by offering current accounts.

It is clear these tech players want to capitalize on their massive data troves. They own an incredible amount of data about their users, their habits, their transactions, and their lifestyles. Now, these companies are betting that there isn’t even a need for banks at all if the transactions stay within their massive ecosystems. By providing all possible services on their platforms, users would have no need for a traditional bank account.

But the world of financial services is quite different from the less-regulated world of social media applications. Regulations and compliance in financial services are far more stringent. For this reason, most of these companies are collaborating with financial institutions. The tech company provides the platform and users while financial institutions provide the necessary financial infrastructure.

The challenges for financial incumbents are manifold. Banks must adapt and provide the suite of services that younger, more tech-savvy consumers have come to expect. No-fee current accounts, immediate transfers, and slick interfaces are now the bare minimum. With legacy systems and business models, it can be difficult for banks to be as nimble as startups.

But traditional financial institutions are not without their advantages. They have long and storied histories as trusted entities. Conversely, the new challengers in the industry face trust issues of their own. Neobanks must convince customers to entrust a start-up with their finances. Tech giants, meanwhile, are used by millions, but face a looming crisis of trust as stories continue to come out about how they use, and often times misuse, their customers’ data. 

The new challengers looking to upend the financial services industry are not offering anything revolutionary yet. Their offerings are primarily current accounts and credit cards, basics that banks have always offered. But outdated business models and bloated operating costs are hindering banks’ ability to respond to these new threats.

To ensure that they fend off newcomers and remain viable, banks must capitalize on their inherent advantages, recognize the expectations of newer generations, and adapt their services accordingly. If they do this, fewer customers are likely to be lured away to the shiny new players, instead opting for institutions they trust to continue meeting their banking needs.

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Keywords : Bank Products & Services , GAFA/New competitors , Business strategy/Model

Geography : International