Would You Bank with Google?

The executives of Canada’s largest banks are faced with a barrage of problems: tougher regulations, stricter mortgage rules, and even Trump’s trade disputes. However, there is one problem that looms over the entire banking industry, one that jeopardizes the necessity of banks altogether - technology.

Tech giants like Apple, Amazon, and Alphabet (Google) have become inseparable parts of our daily lives, displacing entire industries with faster, cheaper, and more intuitive options. A 2015 study by McKinsey has shown that banks are set to lose as much as 60% of overall profits to FinTech companies within the next decade. While technology has dominated countless industries, banking is an industry that has stagnated over the decades. Although the Canadian Big Five banks have been spared from a technological takeover, a closer look at their strategic decisions demonstrates a mad dash towards modernization and technological progress. In the past few years, these banks have dramatically increased spending on technology, with bankers calling it an “arms race,” especially in areas of retail banking, wealth management, lending, and payments. In the past year, Canada’s largest bank, RBC, has increased tech spending to 3 billion, while Scotiabank has increased its spending by 14% - [][1]to 3.1 billion. Partnerships with FinTech companies are also the norm nowadays, with TD and BMO launching RoboAdvisors (online investment managers), and CIBC touting online platforms and money transfers. But in comparison to products like Venmo and Google Pay, banks still lag behind in convenience and user experience. A survey of millennials show that over 50% see no difference between their current bank and competitors, while 73% would be interested in new options from technology companies. The prospect of ditching your credit card and logging onto iBank may seem like a distant future, but it has already been established as the norm in other parts of the world.

Take China, for example: the world’s most populous country and home of the world’s four largest banks. On paper, it would be expected that with growing incomes and the world’s largest middle-class, banks would be thriving with transactions and consumer purchases. In actuality, it is almost the exact opposite. While the vast majority of people store their money in banks, the majority of citizens actually use mobile payments developed by one of China’s two major tech giants, Tencent and Alibaba. Although they may sound unfamiliar, by market cap these are the 5th and 7th largest companies in the world. Past size, what really ties them together is their ability to create financial technologies that have become intertwined in the lives of Chinese consumers. The widespread adoption of mobile payments in China has grown exponentially, processing a staggering 12.8 trillion USD of payments and capturing an estimated 68% of internet users in China. This is in comparison to 15% usage of internet users in the United States and 12% in Canada. To get a sense of the scale of payments, consider Alibaba’s mobile payment platform, Alipay, which processed 256,000 payments per second during the peak of Alibaba’s annual November 11th sale. In comparison, VISA processed 11,000 payments per second during the peak of Black Friday.

So how did mobile payments take off in China? For one thing, the advancement of the Chinese banking industry has stagnated and banks have relied too much on existing technologies rather than innovating. This has created a gap that Chinese tech companies have taken advantage of, leapfrogging the need for credit and debit cards. Additionally, the ease and convenience of mobile payments has allowed these platforms to gain traction with people of all ages, from teenagers to the elderly. The ease of adoption has also been a major factor in the widespread use of mobile payments. Without the need for debit machines, ATMs, or even network connections (all that is needed is a QR code), there is zero cost to establishing mobile payments at any establishment, from street food vendors to Louis Vuitton stores. Finally, the seamless integration with other services has been an advantage that could only come with technology.

Various digital payment platforms at a restaurant in China. Photo: Xinhua

Various digital payment platforms at a restaurant in China. Photo: Xinhua From Tencent’s Wechat Pay, a user can seamlessly use their digital wallet to book hotels, order at a restaurant, pay electric bills, and apply for a cross-border visa — all within a single app. There are never transaction fees, and 100% of the transaction goes to the entity receiving the payment. Card networks such as VISA, payment processors such as Elavon, and banks don't receive any revenue, nor any of the valuable consumer data. A recent study by Nilson has shown that if the US were to adopt mobile payments like China, banks could lose as much as 43 billion USD of revenue per year. Similarly, Alibaba has formed the largest money market fund in the world, taking in 243 billion USD of deposits as consumers deposit savings in their digital wallets instead. With these statistics already in play, banks have no choice but to pour billions into innovation and technology, or face diminishing market shares and stronger competitors.

Jamie Dimon, the CEO of J.P. Morgan Chase, has stated that the race towards the domination of mobile payments and FinTech “is going to be the battle of all time.” While the promise of a technological transformation has yet to take hold, both banks and tech companies are racing to stay ahead of the curve. Last year, Alibaba signed a deal with FirstData to enable Alipay in over 4 million US businesses, while here in Metro Vancouver almost 300 merchants already accept Wechat payments. It’s not difficult to imagine that these services will eventually dominate North America. The question for now is, will they be led by banks or by tech companies?