05 Jun 2014
Google, Apple and other Silicon Valley companies pose a growing threat to financial giants as their data collection gives them the information to effectively target customers
By James Titcomb Daily Telegraph
As one of the most powerful men on Wall Street, Jamie Dimon isn’t the type to scare easily. However, even JP Morgan’s heavyweight chief has admitted to looking over his shoulder at the revolution growing on America’s west coast.
“You’d be an idiot not to think that the Google and Apples… when I go to Silicon Valley… they all want to eat our lunch,” he recently told shareholders. “Every single one of them is going to try.”
Finance is one of the few areas that technology companies, which are defined by their almost limitless ambitions, have made few inroads in. Although internet and mobile banking have become must-have services, the vast majority of customers continue to favour the high street brands that have existed for decades. While the internet has changed many aspects of media, retail and communications almost beyond recognition, areas of lending, insurance and investing are unchanged from 20 years ago.
Slowly, however, major technology companies are beginning to creep up on the financial giants. Google has steadily developed its price comparison software to the point where spooked incumbents are lobbying watchdogs about the search company’s practices. Facebook is developing a payments business in Europe, having recently applied for a licence in Ireland. PayPal, owned by the auction site eBay, and Square, run by Twitter founder Jack Dorsey, are both challenging traditional payment methods. Meanwhile, dozens of start-ups are springing up in London and elsewhere, claiming to offer faster and more efficient financial products than the major banks.
According to Giles Andrews, the founder of Zopa, an internet business that allows people to lend and borrow money to each other, nimble online companies have a series of advantages over the major lenders. “We’ve designed our systems to be more intelligent, and to learn faster,” he says. “We have a clean, simple system for one business model and that makes our technology so much better. We don’t have to do everything the bank does in terms of balance sheets and so on, and that means there’s a lot we don’t have to worry about.”
Internet finance companies are growing rapidly – the amount of money Zopa lent doubled last year and is likely to do so again in 2014 – but it is the globally-established technology companies that have really Wall Street worried.
Google has made no attempt to hide its ambitions in financial services. In 2012, it began to sell adverts to businesses on credit via a Google-branded credit card. In the US its Google Wallet service allows payments via mobile phones.
To date, neither has yet had much success. However, established players are becoming increasingly worried. “In the short term, the effects [of competition with Google] are very manageable,” said one senior person in the price comparison industry, which has been one of Google’s major efforts in financial services in the UK since it bought the website BeatThatQuote.com in 2011.
“The problem is more about the direction of travel. If you take what they are doing to its logical conclusion, then it’s a worry for us. Our concern is that they will essentially drive out competition within the marketplace.”
Price comparison websites are reluctant to publicly voice their concerns about Google, for fear that their sensitive relationships with the search engine – crucial to attracting customers – would be damaged. However, industry sources told The Sunday Telegraph that the company had increasingly taken steps to encroach on their businesses. These include displaying Google’s own price comparison tools when consumers search for alternative websites, and artificially boosting the position that its Google Compare service appears on search results.
Price comparison websites have made their objections known to the Financial Conduct Authority, labelling Google the major challenge to their business model. However, there are reasons to believe that, when it comes to the world of savings, lending and payments, Google is just dipping its toe in the water.
With people increasingly using the internet to bank and shop for financial products, running a bricks and mortar branch network becomes less of an advantage and more of an expensive burden. According to a study from Accenture, four in 10 people aged 18-34 in North America would consider a bank without physical branches. As consumers increasingly turn to the internet to look for financial products, many of them will seek out that information via Google itself. If the company can utilise this advantage to promote its own financial services – as it is accused of doing in price comparison – it is given a head start when a consumer searches for a loan or savings account.
Another major advantage the company enjoys is its data prowess. Having built up reams of information gleaned from emails, searches, maps, YouTube browsing and dozens of other products, Google can develop a picture of each of its users more detailed than any other business. If it were to use this to assess creditworthiness, it has the potential to offer loans far more tailored to each individual or business than any other lender.
According to a report published by Generator Research, Google could turn this potential to asset management, which the analysts claim is ripe for disruption. Generator Research’s Andrew Sheehy has outlined 2021 as the year in which Google’s most lucrative business – web advertising – will begin to saturate, and expects that it could use its data expertise to expertly manage pension and savings plans.
“Compared with the aggressive, hard-charging pace of modern technology markets, the asset management industry moves at a glacial speed,” Sheehy says. “We think that the whole industry is ripe for technological disruption: although they might not realise it, asset managers are essentially sitting on a silver platter ready to be stabbed.“
In the future, if a real time investment management platform was enhanced by [computer] intelligence – which is something that even the top investment managers will probably be slow to adopt, then Google could offer a better return, for a fraction of the management fee.
It would be especially worrying for some if the company moved into finance to gather more information, allowing it to target adverts more effectively.
In airing their worries about Google, one individual in the price comparison industry suggested that it could undercut rival providers by providing many services for free, or even at a loss, due to the valuable data the service would give them.
“One question is: 'Why is Google entering this space?’ There could be an ulterior motive,” the person said. “They have a lot of information but this could be their way to understand even more.”
The strategy would not be unheard of: Google invests substantially in Android, the operating system that runs on the majority of the world’s smartphones, but it is given away free of charge to manufacturers to preserve its internet products against competition from Apple and others.
As Facebook’s recent baby steps into finance show, where Google leads, other technology giants could also spot an opportunity, and follow.
What may be most worrying for Mr Dimon – and his opposite numbers this side of the Atlantic – is that they will not only have to deal with Google, but the rest of Silicon Valley.