Banks Embrace Fintechs to Combat Big Tech Threat

In a rapidly evolving financial landscape, traditional banks are turning to fintech partnerships to ward off the encroaching threat posed by Big Tech giants. According to a recent Economist Impact report, almost half of all banks are considering acquiring majority stakes in fintech companies as a strategic move to protect their position in the payments sector, according to Finextra.

This comprehensive study, conducted on behalf of core banking platform Temenos and based on surveys of 300 banks, reveals that 40% of these institutions view technology giants like Google and Microsoft as their primary competitors over the next five years. The report underscores the escalating influence and menace presented by companies such as Apple Pay and PayPal, which have garnered substantial market share by erasing the traditional boundaries between banking, payments, and commercial activities.

As consumer preferences increasingly gravitate towards all-in-one super apps and dissatisfaction grows with the speed and cost of traditional bank transfers, Big Tech companies have seized the opportunity to enter the payments market. This shift in dynamics has prompted nearly half of the surveyed banks to contemplate acquiring major stakes in fintech firms. The goal is to consolidate their market presence and develop online payment services capable of competing with the established technology giants.

Mick Fennell, the Business Line Director at Temenos Payments, commented on the evolving battleground for banks, stating, «The new battleground for banks is being fought over the future of the payments industry. The next generation is demanding a new level of sophistication when it comes to instant payments. Banks that want to thrive over the next decade need to be able to incorporate an offering that is instant, seamless, and secure so they continue to operate as everyday payment providers to their customers and keep up to date with the expectations being set by the global technology giants.»

Feeling the pressure from the relentless advances of Big Tech firms, banks have been urging financial regulators to rein in these tech giants’ activities and introduce increased oversight under the principle of ‘same business, same rules.’ A senior board member at the Bank for International Settlements (BIS) emphasized the need for a coordinated regulatory response to curtail the power of Big Tech players like Amazon, Apple, and Google. They argued that the existing regulatory framework is «not fit for purpose.»

Augustus Carsens, the General Manager of BIS, expressed concerns that the combination of Big Tech’s control over user data and their massive size and customer reach could precipitate rapid disruptions in the financial services industry, putting established banks at a competitive disadvantage. He stated, «A regulatory re-think is warranted, and it is high time to consider tangible options for action.»

In the United States, the Consumer Financial Protection Bureau recently proposed a rule that would subject non-bank financial companies handling over five million transactions annually to the same regulatory standards as large banks and credit unions. This rule would encompass approximately 17 companies, with notable names including Google, Apple, PayPal, and CashApp operator Block. These firms would be required to comply with relevant funds transfer, privacy, and consumer protection laws.

As the battle for supremacy in the financial sector intensifies, banks are recognizing the imperative to adapt and innovate by embracing fintech partnerships to counter the ever-growing influence of Big Tech giants. Only time will tell how this evolving landscape will impact the future of banking and payments.