While banks have been focussing on getting ready for Basel 3 and dealing with legacy legal issues from the Global Financial Crisis, there has been a seismic shift happening under their noses. Technology companies without the same legacies who have world-leading brands, are customer savvy and have sizeable balance sheets are now adding banking products and financial services to their broad array of consumer services.
New players across many bank products
In a recent report, Macquarie noted that in 2006 Apple and Google had a combined market capitalisation of around $180 billion, broadly similar to JP Morgan and only 20% smaller than HSBC. They now have a combined market capitalisation of over $1 trillion, almost five times the size of either. In fact, Apple’s market cap is equivalent to approximately $100 for every person on the planet. But this is just Apple and Google. There are a raft of smaller players attacking financial services from every angle from on-line transactions, phone banking and peer to peer lending (P2P). Google (Google Wallet), Apple (Apple Pay) and Ebay (PayPal) have already taken their first step into financial services and there is every indication they will keep penetrating these markets given complacent incumbent players, above normal returns and huge cross sell opportunities.
Google Wallet and PayPal are ‘wallets’ which allow the user to store money transferred from a bank account, make payments by email or by touching the phone to an in-store reader. The service is secure and protects customer details. Google Wallet and PayPal are both considered to be much more user-friendly than many of the bank-owned apps that are on the market. As with much of what Google has done, it has purchased a smaller player with an innovative platform (Softcard) to enhance the offering. With its huge balance sheet, we expect Google to keep acquiring best of breed players to augment its market-leading offering across all facets of its business.
Apple Pay is an iPhone App that facilitates point of sale transactions, but it has to be linked to debit or credit cards. Apple Pay cannot store money itself. To use Apple Pay the phone has to be near the merchant reader and authenticated with a finger touch on the touch ID. Vibration confirms payment complete. Card numbers are not stored on the device, but rather a unique Device Account Number which is not backed up to cloud. Macquarie calculates that Apple Pay now counts for two of every three dollars spent via contactless payments on the US’s three largest card networks.
Threat from smartphones
Outside of the ‘big three’ payment offerings, smartphones have the ability to replace traditional banking products. Vodafone has launched M-Pesa which allows users to deposit, withdraw and transfer money with a mobile device. M-Pesa was first developed to provide an easy medium for micro-finance lenders to send funds to third world countries with limited bank branch networks. It is currently only used in limited markets but is being rolled out more broadly as the platform gains greater acceptance. Most importantly, M-Pesa provides an exchange link between physical and electronic cash. Macquarie believes that ultimately Google, Apple, Samsung, etc, will roll out affordable smartphones across all markets, with wallet-based functionality that offers all the benefits of M-Pesa based on a global infrastructure.
One of the largest growth areas has been P2P. P2P lending is where there is a ‘market place’ which connects borrowers and lenders. Whilst this market is only small, it is growing fast through payday lending and consumer loans. With interest rates low, P2P borrowers are paying lenders significantly more than what is available through bank deposits. However these loans are inherently higher risk than many of the loans the banks make and there is a risk that if there is a credit downturn this market could be short-lived. Lenders may not be prepared to take on credit risk if economic conditions worsen.
Major bank consumer lending markets are most at risk, while business banking is a little more specialised and less likely to be ‘disrupted’. Interestingly one of the leaders in this field is Lending Club, which is 8% owned by Google and already starting to enter partnerships to deliver new financing opportunities to specific Google partners.
Commoditised banking is a particular target
Commoditised retail banking products such as payments, credit cards and simple loans are ripe for the picking by the large technology companies using innovative solutions and strong brand recognition. Google and Apple are active in the banking channel and will continue to expand until they have scale positions. As penetration of the disrupters increases, there is heightened earnings risk for the retail banks. Some of the disrupters will fail, especially the newer players, but current bank share prices do not reflect the risk that the big technology companies and some smaller innovators will succeed.
Michael Birch is Head of Equities at Mason Stevens Limited