FAANGs in Finance, Pt. 5: The Compliance Barrier

Over the past month, we documented the upside opportunity for Google, Facebook, and Amazon to build financial services products, following in the footsteps of their Chinese counterparts Baidu, Tencent and Alibaba. This week, we highlight the three biggest roadblocks we see for these companies to become vertically-integrated players versus platforms– Regulation, Compliance and Culture.

Regulation:

Can you imagine Google drug testing their 75,000 employees?

Banking and payment is largely regulated by the OCC which has an extensive list of types, there are a few alternatives for banking regulation such as a Thrift. Investing is largely regulated by the SEC, while lending, real estate and insurance are regulated on a state by state basis. Outside of the application time, review process and process/procedures required to be in place– the decision to be regulated requires careful consideration. All aspects of employee behavior, conduct as well as business practices become subject to regulatory audit.


Compliance

Can you imagine the CFO telling analysts that Facebook’s new bank will have a 5% cost of compliance?
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Banks spend billions of dollars a year on compliance and risk control staff. While banks’ overall headcounts have shrunk considerably since 2007, compliance spending has more than doubled. This trend shows no signs of slowing down, with costs around risk and compliance expected to double again by 2022.

For the largest banks, compliance represents 3% of non-interest expenses. For smaller banks with less assets, compliance takes up close to 9% of costs. Even if Google, Facebook and Amazon build technology to automate most compliance and legal processes, they will still need to hire a couple thousand compliance officers, a huge hit to their bottom line.


Culture

For tech companies, the dollar cost of becoming a bank is nothing compared to the drag on their fast-moving culture and product development. These companies are already viciously competing to build the best messaging platforms, cloud storage, and digital advertising, to name a few. Becoming a regulated financial institution would put a speed limit on many of these projects, and suffocate their culture of asking for forgiveness rather than permission.


Lessons from FinTechs

Many of the most successful fintech startups reached critical mass without becoming financial institutions: think PayPal or Square. Acquiring a banking license takes at least 2 years, and these firms got a head start by avoiding it all together. Last year, British fintech Mondo opted to become a full-fledged bank, a transition that required them to raise an additional £20 million in funding.

While the OCC proposed a “fintech charter” that would streamline this process for growing startups, state governments sued, making slow, expensive banking licenses the only option for the foreseeable future. It’s no wonder most tech companies are opting out.


The Platform Path

While a financial license might be too much of a drag on their culture, we see an alternative path for Google, Facebook, and Amazon finance: the platform play. By building financial products that are compatible with today’s leading financial institutions, tech titans can capture the additional screen time of personal finance, without slowing down their agile, user-focused culture.

Previously in this series:

FAANGs in Finance Pt. 4: Facebook

FAANGs in Finance Pt. 3: Google

FAANGs in Finance Pt. 2: Amazon

FAANGs in Finance: Joining the Customer Journey

FAANGs in Finance Pt. 4: Facebook

Facebook’s closest Chinese counterpart is WeChat – a social network that acts more like a complete operating system than a single-purpose mobile app. Previously, we outlined three paths for Amazon to go into financial services, and how their business mirrors Chinese behemoth Alibaba. This week, we look at parallels between Facebook and China’s WeChat, extracting a few predictions for how Facebook’s product suite can enter finance.

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WeChat is China’s dominant social networking platform, owned by TenCent. While it’s available for download worldwide, it has a vast set of functionalities inside China, acting more like an operating system than a single-use app. In China, its 800 million users can split a bill, book a cab, send cards, shop, and even manage their finances without navigating outside of WeChat’s app. For WeChat, these integrations boost in-app engagement, pull in revenue from service providers, and allow them to build financial products without becoming regulated.

There is a digital rat race to build the “WeChat of the West.” With Messenger, WhatsApp, and Instagram in its product suite, Facebook is currently the front-runner. Each of these products has its own set of advantages for Facebook to integrate financial services. Here are our thoughts on the potential of each:

WhatsApp:

Facebook acquired WhatsApp, and its 450 million users, in 2014 for $19 Bn. Founded and built by a Ukranian immigrant, WhatsApp became hugely popular as a cost-effective way to communicate with people overseas and evade pesky SMS charges. Since waiving the app’s traditional subscription fee, $1 per year, Mark Zuckerberg has yet to monetize its huge user base, but that is likely to change soon.

With an international user base, WhatsApp is the logical platform for Facebook to test cross-border payments. It is already pushing to launch P2P payments in India, seeking to replicate WeChat’s success in Asia’s second-largest market. If P2P payments on WeChat succeeds, it will pave the way to add more value-add services into the app, like personal finance tracking.


FB Messenger:

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At Facebook’s annual developer conference this year, the it-girl was not their social network, but their Messenger app. Facebook laid out their plans to embed business services into the platform, directly in line with WeChat’s strategy. Now you can order an Uber, book a reservation, or shop for new clothes, all within Messenger.

At the same time, Messenger has shown an appetite for P2P payments, and a propensity to help businesses boost their AI capabilities. These two strategies position Messenger as an ideal platform for financial institutions to integrate with. By creating new touch points in an app their clients visit daily, financial institutions can stay relevant to their daily lives and entertain them with custom, behavior-based offers.


Facebook:

Facebook is most likely to embed financial services in its core platform – Facebook. While people flock to Twitter and Snapchat to share live, sporadic updates, they still use Facebook to log the most important updates in their lives: having a baby, getting a new job, or relocating to a new city.

All of this data can help financial firms gain a deeper understanding of their clients lives, and tailor their messaging and marketing appropriately. From graduating high-school to becoming a grandparent, we share much more information with Facebook than we do with our bank. Integrating financial services onto Facebook can help banks avoid the “tone-deafness” that can irritate customers, and connect with clients on a personal level. With an older and more established user base, Facebook is an ideal platform for financial institutions to integrate financial planning and 529 products.


How far is Facebook Finance?

Unlike Amazon, Facebook’s patent applications (425 in the past year alone) have shown no clear intent to become a financial services provider. However, they have shown strong interest in integrating these services from third parties, most recently by acquiring an e-money license for the EU. Additionally, they’ve poached David Marcus, a PayPal executive, to serve as a VP of Messaging Products.

If Facebook Finance plays out in line with these early moves, it will create an opportunity for financial institutions to use the platform as their front-door. This will allow them to lean on Facebook for the front-end product, client insights, and AI capabilities, without causing it to be regulated. In return, Facebook will be rewarded by the boost in screen-time and engagement from its users. A win for both parties involved.

FAANGs in Finance Pt. 3: Google

What’s the #1 source for fast, accurate information? Google. With a culture of transparency and unparalleled data management capabilities, Google is positioned to help wealth managers engage clients by delivering the highest level of insight into their investments. With rumors circulating of a Google Wealth product, today’s financial institutions should act fast in embracing Google’s platform.

In a 2015 FactSet survey, high net worth individuals (HNWIs) were most excited about a wealth management offering from Google, citing their need for more frequent and in-depth insights into their portfolios. A UBS analyst famously used Google satellite images of parking lots to predict Walmart’s revenue. Google analytics can predict unemployment claims before the government finishes counting them. While Google Finance failed to gain traction from Yahoo! Finance, Google has improved the results of stock-market searches by pulling the charts, quotes, and news onto their main search result pages.Screen Shot 2017-07-19 at 10.48.13 AM.png

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Google has danced around the more profitable parts of finance for one reason: Regulation. While Google may have an aversion to the regulated parts of finance, it can still become a major player in finance by leveraging its strength as a preferred platform, its trusted brand, and proven ability to store information securely.

Google still makes 86% of its revenue from unregulated online advertising. Aside from its moonshot projects, its other products are mostly tools to gather behavioral insights that, in the end, further boost their ad business. Here are some of Google’s products that could prove to be a gateway for financial institutions:

Storage:

Google has not been shy about its ambitions in cloud computing. In fact, it has already made the Google Drive a passport platform for healthcare documents, see: How Google G Suite Helps Keep Your Hospital HIPAA Compliant. Google holds 27% of the market share for cloud storage, second only to Dropbox, with 47%.

The Google Drive would be an ideal place to bring together financial institutions and their clients – Google could allow financial institutions to create Google Drive Folders with securely stored client information, and allow the client to set up the PFM and wealth management tools they most desire, talk about personalized. To take it one step further, Google could leverage its platform to help clients control which third-party tools have access to their account information. This would position Google as a client-oriented provider, and help them ease sour relations within the EU – where PSD2 requirements are hanging over financial institutions.


Trusted Brand Offers & Engagement:

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Currently, Google’s financial ads take you outside of their platform to the advertiser’s site. What if they internalized this process by embedding offers, and actions, for trusted brands? In this scenario, Google users could create, fund and manage financial accounts all from Google’s secure, familiar platform. Consumers crave frictionless finance and already trust Google. Why force a user to navigate away, when you can bring these offers into the Google platform? This would boost Google’s user engagement, make it easier for financial institutions to onboard clients, and delight users with a smoother customer journey.


Gmail:  

For individuals, Gmail is the email provider of choice with around 50% market share. However, cloud-based email is still in its infancy for larger companies; a recent Gartner study found that only 8.5% use cloud email from Microsoft, and a mere 4.7% use Google Apps for Work. The remaining 87% have on-premises, hybrid, hosted or private cloud email managed by smaller vendors. Most financial institutions are not using Gmail internally, but they should not underestimate Gmail’s potential for communicating with their clients.

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Rather than serving as a gateway back to your financial institution’s website, Gmail could become a trusted platform for sharing secure information, proxy voting (which 72% of retail investors abstain from today), supporting customers on Gchat, and more.

Financial services emails today get a dismal 2.7% click-through rate. This weak communication channel could be displaced by an in-app messaging system that reduces friction and increases engagement with Gmail users – of which there are now over 1 billion worldwide.


We have explored 3 possible paths for Google to enter financial services, and there are infinitely many ways it could play out. We welcome you to leave comments to share your predictions for Google’s entry into Finance.

FAANGs in Finance Pt. 2: Amazon

This spring, at TechCrunch Disrupt Asia, a leading VC called Amazon the next biggest FinTech company. In this post, we explore the opportunities for Amazon to enter Financial Services – and how today’s Financial Institutions can leverage the Amazon platform to engage tomorrow’s investors.

The Chinese Parallel

Our “Amazon Wealth” prediction isn’t pure speculation – the company’s Chinese e-commerce counterparts have already become financial titans by embedding payments, loans, and investments into their consumer platforms. Alibaba, a $391BN market cap global competitor with Amazon, spun out one of the most successful fintech companies, Ant Financial.

Ant, the creator of Alipay, acquired MoneyGram for over $1BN in cash and entered the Spanish payments market through a partnership with Santander. Ant’s “leftover change” product, Yu’e Bao, took in over $165BN in under 4 years, becoming the largest money market fund in the world. It yields 3.93% on consumers’ spare change, a significant increase on traditional Chinese banks’ funds.

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Amazon is as ambitious as Alibaba, from books to food, music to movies, AI & AWS, and most recently, messaging.  Last year, Amazon filed over 566 patents; this year, it has averaged 32/month so far. The top categories were computing and electronic communication, while their most active Trademark filings are 97 for advertising and 88 for scientific. A bit more digging yields filings for Trademarks on things like “Amazon Coin” which could be a Bitcoin-like cryptocurrency or an internal payment system. Amazon’s wide-ranging patent portfolio indicates they are eyeing multiple opportunities in finance.

How would “Amazon Finance” play out? We see a few paths:

Mirror Alibaba:

Amazon could accelerate their move into finance by gobbling up PayPal or Square. A PayPal acquisition would give Amazon social media assets in Venmo and a strong footprint in global payment systems. PayPal’s origins as a P2P payment system aligns with Amazon’s platform and position as an e-commerce marketplace. Paypal has also remained relatively nimble by avoiding the most cumbersome regulations that slow down other financial institutions, making the company an attractive acquisition target, given Amazon’s culture of “trimming the fat” to maximize efficiency.


Platform Play:

Growth in Amazon’s non-core business lines is often overlooked, but their Trademark filings convey continued ambition across verticals. Amazon could easily become a marketplace platform for a range of financial services from investment accounts to credit cards.  Amazon could build the systems for financial firms to open accounts, enable customers to manage the accounts and interact on Amazon. Over 70% of digital natives would trust Amazon more than a bank site, so why not bring them into the Amazon Tent? This would allow financial firms to leverage the Amazon platform to engage customers, without the regulatory hassle.  The “Platform” angle would give Amazon the “kingmaker” role with Financial Service firms.  The “Platform” play gives them another service to put onto their new messaging service “Anytime,” following in the footsteps of Alibaba’s chief rival WeChat.

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Alt Currency:

An already trademarked ‘Amazon Coin,’ the name of which currently only used for game and app purchases, could be a bold yet logical entrant to the booming Cryptocurrency market. Amazon already does $135BN in annual revenue. Combined with their ability to leverage their reputation for security, Amazon is a natural market maker, the middleman for vendors, suppliers, sellers, and customers. Increasingly positioned as a central pass-through for all things commerce, Amazon launching its own cryptocurrency would keep customers sticky to their platform and boost their bottom line.

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Amazon has trodden lightly thus far with its financial services offering, but we don’t expect their idleness to last for much longer. While we present Mirror, Platform, and Alt Currency as 3 potential paths, there are certainly many more paths that Amazon could take.  What do YOU think Amazon’s next move will be? Send us your thoughts.

FAANGs in Finance: Joining the Customer Journey

The biggest opportunity for Financial Institutions today is getting their product into Google, Amazon, and Facebook’s customer experiences.

72% of millennials would rather bank with Google, Facebook or Amazon than their existing financial institution. You have to wonder how long it will be before these tech giants launch their own financial products.  Financial institutions already receive over 50% of their web visits from clients who pull their information onto other platforms; customers want their financial information everywhere, not just on their financial institution’s website.

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Financial institutions have their own apps, but few are capturing eyeballs like the tech giants do. I encourage any financial executive to try the “Battery Usage” test: on your iPhone  => settings =>battery => scroll down and look at which apps drained your battery for the last 24 hours & 7 days.  We have yet to find anyone with a Financial Institution in the top 5.

Over the next 3 weeks, we will explore the potential of Financial Institutions bringing their customer journey into the experience of Google, Amazon, and Facebook.  In each of these cases, we will discuss how these three companies can serve as safe, secure, trusted platforms for Financial Institutions to engage with their customers, breaking free from click-based advertising to action-based engagement.  These social platforms continue to do what they do best, increase engagement, while the Financial Institutions reap the benefits for their clients.

PS:  We’ve covered WeChat as an operating system here – we look west to learn the best practices, customer trends, and applicability for the US market.