In Search Of Growth: Tik Tok, WhatsApp in Brazil, Amazon & More

Big techs are up on many things. Financial services are under their radar, of course...or are they?

Parents watch out - Generation Z is set to shake up money.  TikTok’s parent ByteDance has an eye on a Singaporean banking license. One thing they can do with the license is to make loans to influencers during times when they cannot dine out or hit TikTok-able destinations due to lockdown. Keen to find out how you feel about this TikTok culture? (I think I might be  too old for it.)

Text your money away like the proper millennial you are! Facebook launched a payment service on its Whatsapp platform in Brazil allowing users to send and receive money via texting only to be suspended by the Central Bank of Brazil after running only for a week. The bank cited “The . . . motivation for the decision is to preserve an adequate competitive environment” This is a little puzzling, when adding a new player would in most cases be viewed as increasing competition for the existing well established players? Could it be connected to the Central Bank’s own instant payment system “PIX” launched in February 2020? All sizeable financial institutions operating in Brazil “must adopt the system before November 16th” “Innovation waits for no-one” except regulators and central banks in this case. 

Welcome to the Amazon jungle. Amazon struck a deal with Goldman Sachs to offer SMBs (small and medium sized businesses) credit lines. The process looks like this: Amazon shares merchant data with Goldman Sachs with the merchants’ consent, Goldman Sachs cherry-picks merchants, who then get the invitation from Goldman Sachs/Marcus. This isn’t Amazon’s first lending initiative - it has been offering term loans through Bank of America. This could be a win for both Amazon - new revenues and fuel for its customers to grow and Goldman - new revenues - with interest rates up to 21%, late fees and even a charge for non-usage it looks very much like business as usual. 

Before we move on to big techs wanting to become a bank and why Wall Street banks would gladly jump into their ecosystems, let’s quickly go over the growth of non-bank lending. The figure below shows the birth of alternative lending startups. 

Personal loan markets in the US have been growing steadily over the past decade and in 2019 49.4% of unsecured personal loan balances were provided by Fintech companies from 22.4% in 2015 according to Experian. The share of mortgage originations by Top 5 banks has decreased from 50% in 2011 to 21% in 2019. SMBs also find alternative loans useful to meet their funding needs. According to SME Finance Forum, there was a $5 trillion funding gap between their funding needs and available traditional financing. Using alternative data sources to measure credit risk, alternative lenders can help serve SMBs that lack credit history. Among alternative loan providers are P2P marketplace, wage advance, invoice financing and more. There’s also a company in between a VC and a lending company. Clearbanc. Clearbanc funds online business founders in the form of non-dilutive revenue-share agreements. If your business is highly-profitable then perhaps this revenue-share is a great idea but in that case, you might be able to get a loan from normal sources. 

Now back to Amazon.

Blurring boundaries

Is there anything Amazon doesn’t do? - selling books, nicely cut fruits (yes, we’re talking about Whole Foods), Amazon Prime movies and TVSeries, Amazon Care (Amazon’s pilot healthcare service), Amazon Pay, Amazon credit card, AWS cloud services and more. Amazon has recently acquired Zoox, a self-driving startup for $1.2 B. Amazon is indeed a jungle.

This week let’s throw light on big tech’s forays into financial services.

Massive customer base. Check. Merchant relationship. Check. Distribution. Check.

The red carpet is already laid out when big tech companies march into financial services. They just need a designer-made gown and to not trip over. It is like pushing on an open door.

Yeah browsing data is cool but have you ever dreamed of actual payments data?

Google Pay. Apple Pay. Amazon Pay. Whatsapp Pay. The first step tech giants take in banking is payments. The balance-sheet ‘lending’ game is too much of a regulatory headache, so providing e-wallets sounds more sane to them. 

However, compared to success stories in their Asian neighbours -  Alipay and Wechat Pay in China, Kakao Pay in South Korea and Paytm in India that have turned into a daily necessity for literally everything from splitting bills to paying for street food or taxis - American big techs’ e-wallet usage seem insignificant. PayPal still dominates the market share. Amazon Pay, the only big tech payment service that also processes the payments, has a market share of 3.63% compared to Paypal’s 56.70% according to Datanyze. The US has a history of many bank failures and for this reason perhaps, is reluctant to allow any one company to become huge and dominate the payment system. Instead, a little-known organisation called the FDIC has the power to ‘put to sleep’ any banks in danger of failing. If there can ever be ‘good’ news about the COVID-19 crisis and recession it might be that although tough financially, this is not 2009-10 when almost 300 US banks failed.

Beyond digital payment services, big tech companies are rolling out banking products in partnership with incumbent banks including the latest Amazon x Goldman SMB credit line. Chase and American Express issued Amazon credit cards and Goldman Sachs issued Apple’s ‘Apple Card’. Google announced last November that they would offer ‘smart checking’ accounts (a transaction account with other benefits like interest or analysis) teaming up with Citigroup and Stanford Federal Credit Union. Okay, it seems like big tech and Wall Street collaboration is as cool as Kanye West x Adidas but why bother? Simple. More data and an avenue to trap customers into their payment services, even more precise targeted ads and thus sell more eventually. 

In Wall Street bros’ point of view, it’s a big push to retail banking leveraging ‘tech bro’ brand power (because the young tech savvy generation might need mortgages at some point?). Incumbents’ digital alternatives haven’t been a huge success. JPMorgan’s Finn closed after 1 year, and Natwest’s Bo closed after 6 months. With fintechs coveting their territory offering more lucrative deals such as high yield savings, maybe the incumbents are nervous or else it is a case of “if you can't beat them, join them?”

Super cool, good work! Now it all depends on if they can provide actual  value to their customers without gorging on fees.