BigTech into payments

BigTechs have been disrupting the payment industry for some time now.

What are their major moves in the payments space and what is their strategy behind it, according to our research from the PSD2 (Open Banking) Market Observatory? And how should banks react?

eWallets’ market introduction

Forgot to bring your wallet to the supermarket? Since the introduction of the eWallets as payment method, this does not have to be a problem anymore. All BigTechs (Google, Apple, Amazon, Facebook, Tencent and Alibaba – also known as GAAFTA) have been developing payment services over the last few years, enabling payments with smartphones or smartwatches via eWallets.

All of them did this by acquisitions and setting up partnerships. Acquisitions were mainly aimed at getting the required payment technology capabilities in-house, while partnerships paved the way for quickly increasing market reach. Partnering with banks is still needed to connect the customer’s eWallet to a credit or debit card. Facebook was less successful in partnering with banks, and instead they invested in their own blockchain crypto technology to operate on Facebook’s Messenger platform.

Benefits for BigTechs

But what are the BigTechs’ strategies behind these moves? Looking at their business model, creating digital platforms, providing payment solutions is a logical next step in keeping the customer with them in another phase of the customer journey. With that, gains can be made at the expense of traditional banks:

• By taking a cut of consumer fees that banks charge as users embrace BigTech functionalities
• By shifting merchant fees away from banks
• By attracting consumer deposits (as we have seen happening in Chna)

Next to that, BigTechs enhance their existing business models with payment services by:

• Improving accuracy of personalised advertising by using payment data (e.g. Google), which can increase advertisement sales. As the head of Alipay Europe said “we are not a payment ecosystem, but a marketing ecosystem”
• Develop new functionalities, such as semantic search, by using payment data. With this a user can for instance get an overview of money spent on pizzas or groceries, which could attract more customers
• Offering a seamless payment method can increase hardware sales and brand awareness (e.g. Apple)

The current BigTech payment method still relies on bank’s credit and debit cards solutions, which made customer adoption easy. But eWallets have potential to evolve. The next step could be to develop account-to-account transfer-based solutions, e.g. enabled by PSD2 PIS and Instant Payments. As an even more bold step, BigTechs could develop proprietary e-money, cryptocurrency and/or payment account solutions. This would give them full control: no involvement of banks would be needed at all.

It’s not too late for banks yet

Is payments therefore another service where incumbent banks are losing their customers to new players in the market? BigTechs have a huge customer base ranging into the billions, so the potential threat is huge. Adoption rates of eWallets are by far largest in Chinese BigTech platforms (WeChat Pay of Tencent: 81%, Alipay: 69%) while US BigTechs have only 1 to 9% of payment service users. The US market is maturing, while in Europe there is still room to grow.

This means that there is still time for European banks to react. But how? It’s needed for banks to take an offensive stance going forward. They can build further on their reputation as a trusted and secure partner for their clients. Banks should leverage their customer knowledge and (enriched) data to develop financial information solutions addressing customer pain points. It’s also necessary for them to drive the scale and efficiency required to compete with Fintechs and BigTechs on a European or global scale.

At the same time, the regulatory developments within the industry need to be watched. Banks need to keep a close eye on the area of data reciprocity– regulation might one day level the playing field where currently banks are required to open up under PSD2, whilst other industries do not (yet) face similar obligations. At the same time competition law may further challenge the size and dominant positions of BigTech. Protectionism of vital payment infrastructures might slow foreign entrants.

Authors

Alexander Eerdmans - Vice President & Head of Financial Services at Capgemini Invent Netherlands

Joost van Putten Senior Managing Consultant at Capgemini Invent Netherlands

Titia Meijburg Senior Consultant at Capgemini Invent Netherlands