There's been a lot of noise over the past year around whether fintech firms — or, more seriously, Silicon Valley behemoths like Amazon and Google — are going to make a run at owning a bank.
The Office of the Comptroller of the Currency moved ahead on its plan to offer a charter for nonbank fintech firms, and then-acting Comptroller Keith Noreika suggested that any firm could theoretically apply, a break from his predecessor.
Lost in all this was an inescapable fact: Big tech firms like Amazon don't need a charter to disrupt the banking industry. Indeed, they are already changing it.
"This is a classic missing the forest for the trees, looking at the charters," said Karen Shaw Petrou, managing partner of Federal Financial Analytics. "Who needs a charter? They can offer the structural equivalent without one."
Amazon has done more than $1 billion in small-business lending since it first started offering loans. In 2017, it launched Amazon Cash, which effectively allows it to take cash deposits from customers via ubiquitous convenience stores like 7-Eleven and Sheetz. Other tech firms, including Apple and Samsung, offer their own payment apps.
It's not clear what tech giants have in store next, but they will likely push the limits of traditional finance. It's not hard to imagine the Bank of Alexa, enabling customers to move money and pay bills just by shouting at the Amazon Echo in their living rooms.
The barbarians aren't at the gate anymore. They're inside the walls.
Some see a massive break looming in the banking business.
In a report issued in late 2017, McKinsey & Co. predicted a split between "manufacturers" of banking, the core business of financing and lending that is hard for tech firms to replace, versus "distributors," the origination and sales side of the business where outside competitors have an easier time entering the system.
If banks effectively end up as utilities to larger tech firms, they will lose out. McKinsey forecasts manufacturing will produce only 35% of profits in finance, a return on equity of 4.4%. Distribution, meanwhile, will produce 65% of profits, with a return on equity of 20%.
"As platform companies extend their tentacles into banking, it is the rich returns of the distribution business they are targeting," McKinsey concluded. "And in many cases, they are better positioned for distribution than banks are."
The barbarians aren't at the gate anymore. They're inside the walls.
Most experts agree that banks still have three key advantages: the sheer ability to manufacture finance, which isn't easy for tech competitors; a mound of data on customers' financial activities; and customer trust.
"When it comes to customers' decisions about where to place their money, research shows that banks enjoy greater trust than tech companies," the McKinsey report said.
But tech companies are putting pressure on banks in all three areas. A recent survey by Bain & Co. put Amazon and PayPal nearly as high as banks in levels of customer trust.
Remember that theoretical Bank of Alexa? More than 25% of U.S. respondents in the Bain survey said they would consider using "voice-controlled assistants for their everyday banking." And Amazon dominates that market. On Cyber Monday 2017 — the largest single shopping day in the company's history — the biggest-selling item was the Echo Dot, its entry-level Alexa speaker. That's a lot of voice-controlled assistants already in bank customers' homes.
Amazon, Google and Facebook are sitting on their own pile of data that includes everything from what customers already own to what they secretly covet (via searches online). There's no doubt that tech companies are eager to find ways to exploit that information in the financial services arena.
Some analysts argue that banks have squandered their data advantage.
"Who owns the customer?" asked Petrou. "Who owns the data? Banks assume they do. They haven't capitalized on it."
So what can banks do in the shadow of Amazon and others' moves into their business?
For one, they can stop focusing on distracting fights about bank charters. Federal regulators are unlikely to grant one to a Silicon Valley firm in any case — and those firms don't need one to take away business from banks.
More important, banks must stay in the forefront of customers' minds. In consumer trust, they are still winning. And while that advantage is eroding, it's not gone yet. And for tougher credits, it may never fade.
"Small banks succeed because they are in their communities dealing with the tough credit issues that nobody else wants to solve," said Howard Headlee, the head of the Utah Bankers Association. "Amazon and Google aren't going to do that."
Banks also need to continue innovating. Customers want to go to tech firms only if they are offering something they can't get at their own bank.
Even McKinsey said banks are making strides there. Both JPMorgan Chase and Wells Fargo recently launched mobile-only banking apps with an emphasis on making it easier for customers to interact.
Through strategic partnerships and a focus on customer service, banks may not be out of the running yet — with or without Amazon or Google trying to enter the business.
"It is not too far-fetched to imagine a day when banks will offer a range of services, reach a vastly larger customer base, and succeed at their digital rivals' game," McKinsey said in the report.
