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  • At The Middle East Banking Forum held in Dubai earlier this month, I noted much discussion among attendees (both on and off record) about Big Tech’s involvement in financial services. But it’s not one way traffic. At least one international institution was transforming itself from an out-and-out banking corporation to a full-on tech business and cherry-picking the brightest and best software engineers and developers.

    It’s not a question of if, but when…

    Let’s assume that it’s only a matter of time before the likes of Google, Amazon, Apple, Alibaba and Microsoft invade the financial services space. In fact, it’s already happened. In 2017—and with $165+ billion under management—Alibaba’s Yu’e Bao fund became the world’s largest money market fund. But any and all of the tech giants have what it takes to compete in the financial sector. First off, they are trusted brands—certainly more trusted by the general public than some banks or investment houses. Trust is a commodity that Amazon, for example, has in abundance. Distribution? Amazon’s Prime Service worldwide user-base runs into millions, so that’s not an issue. Plus Big Tech already has the data and, of course, the technologies. So if such a service were available, it’s likely that a significant number of Amazon Prime customers would happily chat with the company’s robo-investment adviser. And to top it all, banking and wealth are two sectors that are clearly open to disruption. All in all, there can be little doubt that financial services holds significant potential for Big Tech.

    …But there’s no hurry

    None of the major technology players are rushing headlong into financial services. There are significant regulatory issues to consider—something the tech giants have not had to deal with before. Plus of course investors do lose money, so there is a reputational risk. With the squeeze on fees and profits, is the financial services business sufficiently profitable compared with revenues from search-based advertising, social networking, streaming movies or even the provision of healthcare services leave? Doubtful.

    Why bite the hand that feeds you?

    One other influential factor to take into account is that the financial sector—especially banking—accounts for a substantial portion of revenues for the big five tech businesses. Will those businesses risk alienating their banking customers by competing directly with them? I think not. The International Data Corporation Worldwide Semi-annual Public Cloud Services Spending Guide states that in 2018, the banking sector will spend $16.7 billion on public cloud solutions. By 2021, that figure is expected to have grown by 23.0% CAGR. Growth rates for retail-banking products such as current accounts and credit/charge cards pale by comparison. Big Tech is likely to get more consistent and repeatable revenue—and find more opportunities—from the provision of infrastructure services than current accounts and cards.

     The prime target is likely to be wealth management

    The costs and regulations associated with establishing a banking presence, coupled with the potential loss of cloud revenues, are likely to encourage Big Tech to steer clear of that industry. Whereas providing wealth management services to the mass affluent and high net worth individuals—markets which Big Tech already serves—could be a more logical, intuitive and profitable strategy. After all, what’s not to like about buying an index-based ETF directly from Amazon’s ‘funds’ page? And given the numbers involved in terms of distribution, the same company could justify charging fund managers large fees for being included on their investment platform. Apart from factors such as trust and convenience, Big Tech might also win with investors when it comes to the presentation of information. Being past masters of presentation, fund performance and performance attribution would be standardised, colourful, thorough and available instantly. How many wealth and fund managers can offer anything like that to their investors?

    For wealth managers, the possibility of an Alibaba or an Amazon entering the sector is especially concerning when you consider the amount of knowledge they hold about their customers and their spending habits. Imagine the impact on the industry if one or both of those businesses started using artificial intelligence and machine learning tools to provide customised investment products to millions of their customers around the world. Where would that leave the established players?

    As Warren Buffett often quipped, “You only find out who is swimming naked when the tide goes out.”

    Ed Lopez - Chief Revenue Officer - JHC