Beware the Mega-Disruptor

While the FS sector has seen disruption in all shapes and sizes this past decade, arguably nothing would compare to the biggest disruptor of all: the likes of Amazon entering the FSI space.

Fin-Techs, AI, Brexit, challenger banks, digital mobility, tighter compliance – the list of “disruptors” to the FS sector is already a long one.  But many in the sector feel (or more accurately, fear) that the biggest disruption of all has yet to hit.  Namely, the entrance into the sector in a concerted, strategic and long-term way of the digital giants.  The list includes Apple, Google and Facebook; but the elephant in the room, so to speak, is inarguably Amazon.

The behemoth in the room, soon

FS companies have witnessed Amazon completely change the landscape in the very closely-related adjacent sector of Retail.  That the high street today looks very different than at the turn of the Millennium is in no small part due to the unstoppable rise of the online behemoth.

Amazon’s relentless march into other sectors is in part due to the leading-edge, never-say-can’t ethos in its DNA, but also on a practical level because it is in effect requiredto stay on this course.

Asheet Mehta who leads the Financial Services Practice in the Americas for McKinsey, pointed out in an interview with Business Insider that as Amazon essentially trades on its future growth potential rather than its current market figures, it is bound to be looking – and to be seento be looking – for the next huge revenue streams.  And given the size of the prize when it comes to the FS market, many see Amazon’s move there as simply an inevitability: the question is more about ‘when’ than ‘if’.

But what advantages would Amazon really have over established FS players?  The short answer comes in the form of a knock-out triple-whammy. Amazon can rightly claim:

• an unprecedented amount of data about people’s real habits and spending patterns
• great customer loyalty (loyalty which, for Amazon, was “born digital”)
• an outstanding user experience which is constantly being refined and improved.

But why should customers be interested in financial services from the people who deliver their books and clothes?  Surely centuries of experience in providing banking counts for something?  Well again, it’s not great news for the banks. A recent Bain & Company survey of 133,000 banking customers in over 20 countries threw up two alarming facts.  

• The majority said they trust Amazon and PayPal with their money nearly as much as their banking provider.
• 73% of Millennials reported they would be actively interested in hearing about new financial offering from the likes of Amazon and PayPal – more so than from their existing bank.

Added to all the above is the fact that Amazon have in fact for some time now already been making, some would say “by stealth”, inroads into financial services.  Amazon offers a credit card, it offers a restricted-functionality debit card called ‘Amazon Cash’ which lets customers make deposits of up to $500 into their Amazon accounts from over 10,000 retail locations, and it makes ‘small’ business loans to select businesses selling products on the Amazon platform.  Amazon being who they are, you can be sure they are wringing every last drop of experience and insight from these engagements.  If there’s one thing that Amazon (both through its retail site and through its Amazon Web Services operation) has proven it can do, it is to scale.  So banks can be sure that when Amazon do sound the starting gun on “becoming a bank” they will be out of the blocks at tremendous speed.

All in all, there’s definitely something in the Amazon air, which banks ignore at their peril.

What’s a bank to do?

While Amazon’s entry into banking would be a big splash, it doesn’t have to drown competitors.  But, being fore-warned, it also doesn’t hurt to be fore-armed.

One of the ways banks might consider evolving in response to the Amazon threat is to grow their ownecosystem of partners, offering a far wider range of complementary services.  McKinsey articulate this well: “Banks around the world have started to capitalize on their customers' trust and data to build distinctive, end-to-end customer experiences in which they offer both banking and other services.” This model might see banks offering joined-up end-to-end services with the likes of real estate agents or retailers.

Another approach might be white-labelling, whereby banks partner with platform companies who then market and distributed the banks’ services.  McKinsey again: “Today, many banks are considering this option. Pricing is a concern: If banks are cut out of the primary customer relationship, can they set prices high enough to make a return? In many cases, the answer is yes.”

And again, taking the fight directly to Amazon on their own terms might well be the best way of staying in the game.  In other words, getting your data insight and personalisation, your digital interaction, and your customer experience all in top working order.  While these are all things that banks today shouldbe doing anyway, the expected incoming arrival of a huge new kid on the block means it’s a good time to step up and accelerate.

Be prepared

I’ll give the last word back to Asheet Mehta of McKinsey: “The greatest threat to banks from digital competitors no longer comes from FinTechs, which have often struggled to scale and have entered into partnerships with banks.”

For the last five years or more banks have been keeping a wary and sometimes panicked eye on the threat from FinTech, but it turns out that the most significant threat to incumbent banking providers actually came from Big Tech all along.