The Master Algorithm: The Cost of Free Data
Alibaba’s recent investment in Kakao Pay, proves once again that it is no secret that tech giants have a huge appetite. The more they grow, the hungrier they are, the hungrier they are, the more likely they are to eat someone else’s lunch. In this case it appears that financial institutions’ food looks the tastiest.
Banks are loosing their monopoly on banking for many reasons, among which: dissatisfaction and lack of confidence from customers but also their inability to bank low social class individuals.
KPMG Banking on the Future 2017 Report showed that 84% of “Gen Y-ers” in Australia would consider banking with a tech giant if they offered a better product or deal than a traditional bank.
And according to an even more recent study by Business Intelligence below are the main consumers’ reasons for choosing tech giants as their bank providers:
Source: Business Intelligence
Even though these tech companies have not fully stepped into the banking industry yet, the danger is close for banks. The same study reported that 28% (nearly 1/3) of customers in the UK, Germany, Belgium and the Netherlands said they would consider using banking services provided by companies like Amazon, Google, Apple and Facebook, and you know what? I agree with that 28%.
Due to stringent regulations, banks cannot escape from the traditional bureaucracy culture that is weighting them down. Opening a bank account is more of a hassle than anything: one needs to provide identification papers, certificate of employment, proof of address and so on. On-boarding processes take time, energy, money and require tons of paperwork. And if you ever move to a new country just for a few months, you better hold your breath if you are planning on opening a local bank account. Most millennials these days do not have or do not want* to have time for that. Some FinTech start-ups have already started providing solutions to these issues. For instance, Neat, a start-up based in Hong Kong, instantly provides debit cards to users with a very short and easy on-boarding process made through their app and based on facial recognition technology. — Regardless of neo-banks and fintech start-ups, tech companies seem to be another good alternative to the issue.
Growing up with the GAFA’s (Google, Amazon, Facebook, Apple) I, as a millennial trust and identify myself more to these brands than with any bank. And, as we can already witness, the same is happening with younger generations, only more amplified. Most kids these days have Apple accounts, buy games from the App Store and pay for Apple Music before even opening regular bank accounts. How? By either using their parents cards or available iTunes gift cards. This means that tech companies are a long way ahead of banks when it comes to capturing customers’ data.
The potential here is huge, especially if we point out the importance of data in financial services.
Millennials are currently facing the paradox of being cash poor but data rich, and in a world where data is becoming king, this might just turn into our advantage. Data is a currency that is constantly exchanged to benefit every party involved in the transaction:
The more an institution knows about you, the more personalized services it can offer you, the more personalized services you receive, the more you are likely to use it.
When you think about it, every single day we are willingly sharing personal information with our favorite brands. Facebook knows the places you are most likely to go to, Amazon keeps track of the things you buy and Google, well Google just knows everything. We take them everywhere, they are with us all the time: in our homes, our offices, our cars and even our pockets. This is called data value exchange between the brand and the customer: you swap data for a better experience. This is how tech companies are able to build an emotional connection with their users, a connection that banks are unable to create.
Data is the weapon used here with its trigger being customer intelligence.
Data is collected, processed, stored and re-used for the greater good of the customer. While traditionally, people were reluctant to sharing personal information easily, this generation is more inclined to consider the benefits of doing so. Data here has a significant value, as it has significant power over human beings. We own our data, we willingly give away this data, but at the end of the day, the reality is our data owns us. We call this the dictatorship of Algorithms: we give away information that algorithms use to remind us of what we need and what we want. Scary, isn’t it?
Having a younger customer base (a person can open a Facebook account at any conscious age while have to wait until at least being 18 years old to open a bank account), tech companies are winning the race of who is going to own most of the available data. And, by using this data, they can not only answer clients’ needs but also predict it, something that banks have not been able to properly do. Indeed, customers are now more attracted to the easy and convenient and are mostly looking for an omni-channel experience that most banks cannot offer as they have been falling behind when it comes to tech innovations.
On the other hand, tech giants have been leading the way. On top of innovations such as Apple Pay, Amazon Pay or Android Pay by Google, other initiatives have shown that it is only a matter of time before they start pulling the trigger. Starting as an online marketplace, Alibaba is a great example of how tech giants can take over financial institutions. In fact, Yu’e Bao, Alibaba’s affiliated platform for money market investment has recently outrun JP Morgan’s US government money market fund by becoming the largest money market fund globally with 165.6 billion USD under management. While it took more than 200 years for JP Morgan to build and sustain its reputation in order to reach the top, Yu’e Bao managed to steal the spotlight in only 4 years of existence. Facebook has also started playing in this field by acquiring e-money and payment licenses out of Ireland and therefore entering the European payment space while still covering the US one. The social media platform is slowly tuning into a marketplace with the option of connecting to bank accounts directly through APIs and therefore becoming their own payments processor. –Easy, quick and convenient.
One mistake to avoid here is to think that these companies are aiming to become banks, because they are not. Currently focused on the payment space rather than broader financial services, what is more likely to happen (and just like we saw from the examples above), is them taking over every aspect of banking such as loans, payment services, money transfers etc and offering it to customers without having to face any regulatory compliance requirements as they would be operating without the need of having a banking licence. — Again, easy, quick and convenient.
While everyone thought FinTech might be the ultimate disruptor, it is more and more likely to see TechFin taking over this role… Or can the two cohabitate?