- S&P: “We currently do not see competition from tech titans as posing a short-term risk to our bank ratings.”
- But in the longer term banks could face serious competition from the likes of Apple and Google in the payments space, which can account for up to 15% of retail banks’ revenues.
- Challenges could come faster in Europe, where new legislation is opening up the financial system.
LONDON – Credit rating firm Standard & Poor’s believes that “tech titans” like Apple and Amazon don’t pose a threat to big banks in the short-term, but could challenge their payments businesses in the longer term.
Credit analyst Paul Reille and team published a note this week titled: “The Future of Banking: How Much Of A Threat Are Tech Titans To Global Banks?”
Reille and his team conclude: “In the short term, we don’t expect competition from tech titans to have an immediate impact on the banks that we rate. However, in the long term, we think that they are well-placed to potentially disrupt certain aspects of the traditional banking industry value chain.”
Amazon has a lending program for sellers on its platform but Standard & Poor doesn’t believe tech giants are likely to pose a serious challenge banks in this area, due to the high regulatory burden associated with lending in the US and Europe.
S&P likewise doesn’t expect tech companies like Google, Facebook, or Apple to take deposits due to the strict rules governing the activity.
“In the long term, regulation is likely to remain a key factor deterring tech titans’ efforts to increasingly offer the full financial services suite currently provided by banks,” Reille and his team said.
“That said, banks could feel the biggest competitive threat from tech titans for activities where barriers to entry are low – such as transaction revenues, which could constrain their margins.”
S&P argued that the biggest threat to banks in the US and Europe is in payments, where the likes of Apple, Google, and Samsung have all already launched products, which S&P dubs the “Pays.”
“Although these firms are not posing any meaningful short-term pressure on fee income, we believe that they could leverage their strong customer bases and networks to potentially constrain traditional banks’ payment services revenues in the longer term.
“Amongst other advantages, tech titans have high investment capabilities and financial firepower, strong brands, very high numbers of loyal customers or users, state-of-the-art IT systems and technology, as well as a distinct ability to gather, analyse, and link customer data.”
The threat could materialise quicker for European banks due to new regulations – PSD2 and Open Banking in the UK – that will open up the financial system to outside entrants this year. (We’ve written about this possibility before.)
S&P said: “Under the EU directive, external parties like the Pays could begin to initiate payments on behalf of customers using their smartphones to shop online or in retail stores.
“In the long term, we believe that in certain regions, banks might increasingly feel some pressure on their fees and commissions due to the possible growth of the Pays, the wide-scale adoption of mobile payments, and the proliferation of account-to-account transfers.
“The most affected banks would likely be retail banks in Europe and the US where interchange and card transaction fees can account for up to 15% of total revenues.”
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