Internet giants will not try to replace banks but will disrupt the sector through other services that take consumers...
away from traditional banks, says analyst firm Forrester.
While traditional banking services, such as accounts, loans and mortgages, are unlikely to be offered by the likes of Google or Facebook, some peripheral capabilities are suited to their expertise.
Like Amazon – which partners with individual retailers to link them with customers, offering transactional services, product comparison, delivery and reviews – Google could offer similar services in retail banking, becoming a middleman across the sector.
Since the launch of Google Checkout (which recently merged with Google Wallet) in 2006, Google has been acquiring, partnering and investing in firms in areas of financial services, such as payments, comparison and loyalty cards.
In its Why Google Bank Won’t Happen report, analyst firm Forrester said the high costs and strict regulation of setting up a traditional bank – alongside advertising revenue coming from banks – will push internet firms into roles that support the relationship between banks and their customers. These include transactional payment services, financial advice, money management and product comparisons.
In the past, consumers could see beyond traditional players for these services, but the finance sector is dependent on IT today, and some IT-based companies have better technology. Add to this the public's distrust of banks and regulators' desires to increase competition and you have an opportunity for alternative financial services firms.
"Google’s reputation as one of the most disruptive firms in the market has left many digital financial services executives worried about a potential new rival: Google Bank," said Forrester analyst, Oliwia Berdak.
Berdak recommends banks to observe Google’s next moves, learn from its best practices, and consider any partnership.
She said many retail financial firms misunderstand the threat from companies such as Google and have not grasped the full potential of digital disruption.
"They think new competitors will use their digital might to beat them at their own game. Digital disruptors, such as Google, are disruptive because they don’t play by the rules," she said.
"Instead, they use digital technologies to deliver better or entirely new ways of meeting customer needs, often bypassing regulation and re-defining a given industry in the process."
She said the future of Google’s financial services lies in the integration and leverage of the firm’s other products to create new customer value that goes beyond payments.
"It will be by integrating digital assets such as its search engine, Google Maps, Gmail, Google Play, and Google Now that Google could redefine financial services. Thanks to these capabilities, Google is well positioned to disrupt four interlinked areas, disintermediating incumbents in the process," said Berdak.
Traditional banks are over expanding to keep up with digital developments. With legacy IT infrastructures weighing them down, many are making mistakes when it comes to mobile and online banking.
Recent system crashes have highlighted weaknesses in banking IT. Jean-Louis Bravard, director at Burnt-Oak Partners and former CIO at JP Morgan, said UK banking IT faces major challenges. "Bank IT in the UK is not OK,” he said.
“Banks rely on obsolete legacy IT surrounded by an ever-increasing plethora of newer systems to give consumers the impression that the banking systems are fit for purpose in our internet and smartphone world.”
By other companies providing links to customers using technology designed for and trusted by consumers banks can focus more resources on what they do best, offering accounts, mortgages and more.
Could Google’s, and other internet firms’, increasing presence in financial services help repair banks' damaged reputation with consumers and focus on what they are good at, rather than hastily launching app after app?
Chris Skinner, chairman at the Financial Services Club, agreed that companies such as Google will not try to become banks, but can revolutionise retail banking. “The core part of banking is boring for the likes of Google and Facebook but they are perfectly positioned to provide information enrichment in financial services," he said.
He said this means banks can focus on what they are supposed to do: “The banks will be there to make sure the services are always available and the like of Google will tell consumers what they need to know.”