This is a scenario which the World Economic Forum (WEF), in a welcome if unusual burst of relevance, is looking at. It’s a real possibility, and it’s likely to disrupt like few things have ever done.
The WEF report argues that the tech giants are also the suppliers of infrastructure, and that the fin tech companies are the handlers of data for the sector. The digital experience side of the equation, now inseparable from modern finance, is a new environmental factor which sets the stage for huge possibilities.
It’s a perfect hurricane of situations, ripe for exploitation. The tech giants, however, are the really big players, and they can back themselves up with big money. That sledgehammer-like reality is the most powerful force which can hit the financial sector. “Disruption” would be a mild description.
Setting the scene for a financial revolution?
The current state of play in the dilapidated, barely credible finance sector is that this gigantic, multi-trillion dollar cash cow is its own worst enemy. The sector has spent so much time playing politics and doing deals that it’s essentially out of the loop in many areas. The sector is now so convoluted and self-serving that just about any real competition would trash the current house of cards.
It’s anyone’s guess how much real money gets through to the real world from this jumble of derivatives, barely understood hedge funds, commodities, futures, short selling, and “1%” based market manipulations. Any guess about how much of this money makes contact with real businesses and real consumers certainly wouldn’t be extravagant.
Then there’s the global rot, the economic stagnation in which the sector so blissfully basks as if it was a success. The global finance sector is awash with lousy financial products, appalling judgment, and political irrelevancies that its image is appalling.
That image is all too accurate. The sector’s recent donations to the world economy like the failed banks, sub primes and the Great Recession, are the hallmarks of a sector which is well past expiry date.
If big money and advanced marketing move in to the financial sector, there’s not much this Museum for Bean Counting Morons can do about it. Google, Amazon, and Facebook are the subjects under discussion, but major leaguers like Microsoft and Apple would also be possible players.
Is it worth doing for the big techs? Yes.
The obvious question is what’s in it for them? This isn’t their core business. The logistics of setting up financial services can include a big, irritating, learning curve. They don’t actually need to enter this market; they can continue to benefit as the financial sector delivers them with a hefty chunk of their existing revenue.
That said, diversification is common in just about all consumer-oriented businesses. Supermarkets don’t really need to sell insurance, but they do. Many accounting services also sell financial services. They do it for significant profit, and that’s the more likely scenario for a major move. If the big techs move in to finance, they’ll have scouted the markets and seen real upsides.
Google, Amazon and Facebook have another major advantage in any commercial environment; their distribution. They can sell anything worldwide, from a yacht to a 401K with ease. In distribution, no financial institution can compete.
They’d get significant market share almost instantly, further unravelling their more conventional competitors. People looking for alternatives to the banks, in particular, would be quick to check out the new options. The effect of losing market share for the major financial institutions could be a few heavy calibre bullets hitting their bottom lines.
Can the big techs create a new financial market? Yes.
It’s an interesting range of possibilities. New players in the market could call the shots with new, different financial packages. They could offer better deals based on volume. (The mainstream market competition, to put it bluntly, is laughable at consumer levels. Financial product quality is absurdly obsolete.) They could also haul in a lot of cash to fund expansion of their own very healthy core businesses.
The tech guys don’t have to take risks. They don’t have to play at being banks. They don’t have to give loans or enter in to any of the sticky/thankless areas of finance. They don’t have to create derivatives or junk bonds, or any or the other messy financial products. All they need to do is deliver value to their customers with good financial products.
For example – Imagine a cash management fund offering 10% interest to consumers and/or corporate clients. The stampede to value would drag just about every dollar on Earth in to a fund like that. That’s “disruption” on a truly global scale.
These no-brainer good options are also exactly what the finance sector doesn’t deliver. The whole market is wide open. If the big tech monsters decide to look at their options, they’ll like the lousy market positions of the banks and financial institutions. They’ll also see very little innovation and less talent in terms of product values.
The dino-banks and their relatives have existed for decades in a sort of inevitable market position. They’re traditionally the only available choices. That’s no longer the case. The 1980s are over. Anyone, let alone huge tech companies, could now crash in to this very insular market and do good business. Anyone with half a brain could barge in and get market share simply by selling good products.
Done properly, a foray by the big techs could be a great move for both them and consumers:
1. Having more and better options for financial products and services, particularly investment, can only be good for the consumers.
2. The inevitable tide of digital finance technologies will reposition consumers for investment purposes, anyway. It makes sense that the giant techs and financial techs will lead in both delivery and product development.
3. Blockchain financial technologies improve online security and transparency. The new systems, unlike the old, can obviously manage themselves pretty well. The tech monsters, unlike the banks, won’t be blinded by the science, or the data loads.
4. The companies benefit from access to a potentially massive source of capital and revenue. Stockholders aren’t likely to mind that too much.
If ever a sector fully deserved a massive comeuppance, it’s the finance sector. It will happen. The only question is when.
