Google takes a bite of banking
Leveraging UX, cost, but also, its position as a gatekeeper, Google moves into banking. This presents a new headache for regulators.
It long ago had media, retail is now a main course, and the automotive and health sectors are the new entrées. But Marc Andreessen's dictum that "software will eat the world" has until recently not yet come to banking in the West.
And one of the main reasons for that, ironically, is that banking regulation and onerous national-based capital requirements have made platform companies very wary of entering fractured country banking markets.
However, during Q4 2020, Google announced that it had relaunched its Google Pay app in the US, "making it easier to organise finances and save money." It will for example feature a powerful - and no doubt lightning-fast - search function, allowing users to see and group transactions in new ways. It will also allow users to crawl their Gmail account, find receipts and read them, to be automatically included in their Pay financial tracking.
Its Pay Tab will emulate features of Venmo, like put multiple people in a chat and let them send and request money from each other. The Insights tab will allow you to connect other bank accounts to get an overview of your finances.
Better UX, but also a bank account
Yet, this is not only a series of UX interventions to make things more convenient, as powerful as this has proven to be. The Explore tab, for example, will now allow users to see personalised deals and discounts (no doubt machine learning-driven).
But more importantly, Google will launch a digital bank account (including savings), called Plex, next year, with a range of US banking partners, including City Bank.
Unlike most current accounts, these will feature no charges, no minimum amounts, but also, for now - no overdrafts. Although Google's banking partners will provide the current accounts, it will feature minimal partner bank branding. Google will provide the user interface, and the current accounts will all, no matter the bank, carry the same name: Plex.
Aggregate and facade
This is a classic Aggregate and Facade Strategy. In the last quarter of 2020, Google announced no less than 3 initiatives that use this strategy. News Showcase is one such example, an initiative where Google hopes to ease pressure from beleaguered publishers and irritate regulators.
With the Aggregate and Facade strategy, Google uses lighter touch product innovation to leverage Google's position as a gatekeeper to many points on the Internet. The aim is not to recreate a product or service end-to-end, but to mediate aspects of it, like service discovery. It hands-off core functionality, to not one but several partners, but still gains access to data. With this partnership approach, Alphabet, Google’s parent, also hopes to evade regulatory intervention.
What's in it for Google?
By partnering with banks, which provide the financial plumbing, Google can hand off local regulatory responsibilities in each jurisdiction.
Google gets access to more valuable payments and current account data, just what an “AI conglomerate” needs. Google already offers a machine-learning-infrastructure-to-enable-lending product to banks.
The Pay App's improved convenience and usefulness increase users' likelihood of using it for payments, which are lucrative (the payments market size matches that of advertising).
Google becomes a gateway to banking, a market several times the size of advertising and hosting.
The payment and current account data it obtains will enhance Google's ability to transform it via machine learning to profile users. This data will conceivably enable Google to:
Improve user experience and convenience across its services;
Increase their advertising products efficacy;
Help partners to do personalised offers inside Plex;
Create risk profiles and provide credit in conjunction with their banking partners.
What's in it for Banks?
You might wonder. The very real danger here for banks is that they become commoditised back-office providers of financial plumbing and regulatory licences. But Google will probably prove to be an irresistible force. There are several reasons for this.
Current and savings accounts provide banks with the kind of capital regulators now prefer banks to hold in large amounts after the financial crisis.
And Google does not have to take the biggest banks head-on. Although there has been much consolidation, there are still hundreds of smaller local banks worldwide. Many of them struggle with the technical and design know-how to build user-friendly applications and offer the efficiency that machine learning-based data profiling makes possible. Some, like City Bank, are huge but lag the other big national US banks for current accounts.
Remember Google is not partnering with banks for their brands or the distribution that the banks’ remaining branch footprint offers. They are doing it for their licenses to bank in particular territories. Google will take care of service discovery and distribution.
What's in it for customers?
Free current accounts, with great user experience and convenience.
Machine learning-driven deals and coupons.
Google's data, coupled with its profiling algorithms, will make it easier and more efficient for merchants to offer deals (coupons) inside Plex, as Google can help them identify who to target. Later, because of superior machine learning risk profiles, it could also make it possible to provide users with cheaper credit, together with their partner banks, than banks outside of Plex can provide on their own.
What about other tech competitors?
Apple has already announced a Credit Card in conjunction with Goldman Sachs.
Amazon is already providing credit to merchants.
Less constrained by regulation at first, Chinese digital platform companies like Alibaba have gone down this route already, even providing credit themselves through Ant Financial. This happened to such an extent that regulators feared for the future of the Chinese state banks, and the stability of their financial system as money was sucked from it to the platforms. The Chinese authorities subsequently mandated that platforms provide loans through banking partners.
The regulatory conundrum
If successful it would be the most significant "Aggregate and Facade" strategies Google has done and allow it to gain a substantial foothold into yet another industry, financial services.
Regulators choice weapon for targetting companies for regulation is through the lens of market power. Economic theory says that market power should not be equated with big is bad. It is only problematic if market prices lead to more expensive prices or less innovative services - as economic theory suggests it would.
Yet the theory of market power would not be the last victim of digital technology. It remains an open question if this development would reduce consumer welfare. It might do the exact opposite, making banking free and credit cheaper for consumers.
Bear in mind, that in the US, a significant portion of the population is still unbanked (5%) and underbanked (17%). In some developing countries, the number of unbanked and underbanked is much higher. One of the main reasons for this is minimum balance fees. On top of that The Bank for International Settlements (BIS) has published research that showed platform companies have access to data that allows them to extend credit, where banks are running blind.
However, if Google also moves into banking, levels of overall concentration, already high, would go much higher. The risk may be considerable for the stability of society as a whole. We need another rubric other than market power to look at this scenario. One not dissimilar to that used when determining media plurality, ie. some bespoke limit on the concentration of power. Yet such a major regulatory intervention needs a good theory as a foundation to provide it with legitimacy.
We do not have one in our toolbox—yet.