Finance and technology are converging fast. Advisors who pick the right partners now can survive the realignment of assets — those blinded by the headlights of the future won’t get a second chance.
Modern money moves in increasingly frictionless circles as technology finds way to overcome regulatory drag and other barriers. That’s usually considered a good thing because it allows faster transactions, cheaper pricing, more efficient market access for everyone.
But the companies making it happen aren’t content to simply sit back and keep the pipes open. Amazon and Paypal are already talking to bank regulators about a new kind of charter that would let them hold the money.
And where they go, Apple, Facebook and Google will follow. Silicon Valley has financial services on its radar. Those of us who already work in that world need a strong offense — and that means sourcing the technology required to counteract new competitors’ strengths.
I’m putting the last touches together on our next Wealth Management Technology Guide in the next few weeks. It’ll be out early next year, with all the tools and solutions that caught our attention. (If you’re not in there, drop us a line. There’s still time to tell your story.)
When it comes out, I hope you’ll review it. It’s more important than ever.
The inside track
The only factors really keeping Big Tech out of conventional banking right now are regulation and ambition.
Standing regulatory barriers kept Walmart from getting a banking charter and opening in-house branches in its sprawling store network. That separation of activities continues to keep payment processors like Paypal and Amazon from originating loans or accessing central bank liquidity.
But Amazon in particular has worked around the rules by offering the equivalent of cash advances to third-party merchants on the site. Because you need a seller account to qualify for the program, it doesn’t formally qualify as “lending.”
There’s 2 million small business owners on the platform. Every dollar they access through Amazon is one they won’t be applying through traditional banking channels to get.
Now imagine the company applying similar logic to matching its 80 million Prime subscribers to financial products, services and advice. Here too, Silicon Valley has the inside track.
The algorithms that run Siri, Alexa and other voice search apps provide Silicon Valley with an enviable window into our personal financial habits and preferences.
When we ask for a referral to a bank or advisor, the app increasingly constructs its answer out of what it’s “learned” about who we are and how we stack up to millions of other users.
Especially where Amazon is on the table, that data trail also includes a big slice of our retail activity. Alexa knows a lot about we spend and what we buy. The more we buy from Amazon, the more it knows.
From that base, Jeff Bezos’ team can build out remarkably robust consumer budgeting tools and start making “suggestions” about financial products and services that might fit identified needs.
Suddenly it’s not so hard to imagine Amazon as dispensing a form of financial advice — some calculators, some automated alerts and targeted offers — as part of Prime or some other subscription membership.
Is it an instant advisor killer? Not at all. But just like the on-site “loans” have already drained $3 billion from the conventional small business banks, it’s a drag on an industry that’s chasing fresh assets as hard as it can.
Get disruption on your side
Multiply the Amazon effect by a galaxy of hungry start-ups with novel approaches to the old problem of moving money around, and the institutional landscape is starting to feel the pressure.
Millennials have zero problem with trusting Silicon Valley with their financial details. They grew up with these companies and if anything, the brick-and-mortar banks implicated in the 2008 crash are the ones with a reputation problem.
Over the next few decades, people who instinctively lean toward the money center institutions will fade from the economic mainstream while the new generation takes their place. That’s a fact. By 2030, Baby Boomers won’t be opening a lot of accounts anywhere and names that dominate the industry today will need fresh blood if they want to stay relevant.
You’ve seen what the proliferation of robot advisory platforms have done to asset gathering. Convenience and price are powerful competitive advantages — to fend off high-tech rivals, flesh-and-blood advisors need to know how to communicate where they actually add value.
We’ve talked endlessly about this over the years. It boils down to coopting what technology does well while emphasizing where you excel.
As Siri and Alexa emerge as major sources of new client referrals, make sure your name comes up. Describe your practice in terms that complement and transcend automated calculator-based approaches: you have the math and the human touch.
Demonstrate that touch whenever you can. It’s your edge. And if Silicon Valley needs expertise, speak up. Get on the platform. Get those referrals.
Meanwhile, there’s nothing stopping you from doing what Silicon Valley does. All of these tools are available to advisors in the here and now.
Account aggregation and budget monitoring aren’t exotic options any more. They’re strategic necessities if you want to keep up with Big Tech, another price you pay for staying in business.
Likewise, modern CRM is essential. Silicon Valley already has deep relationships with users, in some cases building on decades of accumulated patterns of data.
And you’ll want the ability to automate the routine aspects of your business. Where Big Tech has a compelling advantage, there’s no reason not to adapt what you need to keep up.
Add it all up, you can do everything Big Tech can do and more, provided you have the right partners. That’s what the annual Technology Guide is all about.
Down the road, maybe all this means Amazon and Apple replace Bank of America and Citigroup. I think it’s more likely that the money centers will evolve with the market — but smaller and more vulnerable players will feel the squeeze.
If your professional brand depends on theirs, you’re hitched to a tired horse. For the rest of us, the future is always a moving target, and right now it’s as bright as ever, even if you’re not Jeff Bezos.
grew up with closer relationships with Big Tech giants than brick-and-mortar banks. If anything, the banks have a trust
That’s where the automation comes in.
Now a wide range of tech companies are trying slightly different tactics, working around the rules to carve out a case they deserve special-purpose charters.
With a new form of OCC charter on the horizon, the regulatory barrier may be dropping even as we speak. Non-banks want to
That’s effectively a declaration of war for companies that are currently content to facilitate transactions without squeezing other intermediaries out of the chain.
Paypal, for example, is already considered a bank in Europe, but has yet to pursue similar status here. They work through preferred lenders to offer lines of credit. One day other online payment companies may pursue similar arrangements.
Amazon, on the other hand,
Likewise, Visa and MasterCard don’t extend credit. They work with lenders to make it happen. The lenders get the interest. The processor earns a small fee for keeping the network running.
But with a new form of OCC charter on the horizon, the barrier between moving the
With various start-up robo lending and robo portfolio apps lobbying for a new form of OCC charter
The case for Big Tech disrupting conventional banking boils down to access and automation.
On the access side,
As long as the tools only provide general model-driven suggestions, this approach
The ultimate source of the advice may not come from Silicon Valley, but
out a robust consumer budgeting tool is
are already open to referring requests to corporate partners
already has the home court advantage when it comes to pointing consumer transactions to favored vendors. Ask Siri or Alexa or the Google Assistant to suggest a bank or financial advisor and corporate strategy plays a role in the answer.
The giants also have an inside track on a
When and if one of the giants finds a way to p
75 billion cash and short term apple
245 publicly traded institutions
25 billion amazon
Companies like Amazon and Apple have been prevented from entering retail banking — but it could be time to reevaluate those rules. Keith Noreika, acting head of the agency that oversees US national banks, said this separation may not fit the modern economy: “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so,” he noted. Nearly half of banks and credit unions already consider large tech companies “a significant threat,” according to an Infosys survey. And McKinsey found that 73% of US millennials would be more excited by a new financial service from Amazon, Google, Square, or Paypal than from their bank. • Share your thoughts: #BankofAmazon
Bank of Amazon. Facebook Financial. Wal-Bank.
Amid intense lobbying by financial firms, U.S. policy makers for years have rejected attempts by big companies to muscle in on banking.
But Keith Noreika, the temporary head of the agency that oversees U.S. national banks, said Wednesday that it’s time for another look. Addressing the industry at a conference in New York, he called for ending the centuries-old separation between banking and commerce.
Noreika, who is serving as the acting leader of the Office of the Comptroller of the Currency, acknowledged the taboo nature of upsetting a fundamental principle of financial regulation. Still, he argued that the goal should be boosting economic growth, not keeping lending and retailing separate because that’s what has been done traditionally.
“Such dogma props up bureaucracies that maintain the separation and serves the interest of the status quo without regard to why the separation exists in the first place or whether the separation has any usefulness for today’s economy,” Noreika said.
Read More: Bank CEOs Can’t Agree on How Scared They Should Be of Amazon
Allowing tie-ups could enable Amazon.com Inc., Facebook Inc. and Wal-Mart Stores Inc. to get into the businesses of lending and financing that have long been dominated by companies like JPMorgan Chase & Co. and Goldman Sachs Group Inc. And there are already real-world examples of Goldman and Morgan Stanley using special exceptions to dabble in commodities industries, subjecting them to criticism from lawmakers and extra attention from regulators.
Though the OCC could get the ball rolling on allowing lenders into commerce by opening up bank chartering to financial technology firms, a true overhaul would take action by lawmakers.
As Noreika points out, the separation -- which has roots in the 18th century -- is meant to “protect banks from the corruptive power of commercial ownership and protect the market from banks consolidating and wielding too much commercial power.” He contends that it reflects obsolete thinking and that its motivations were never pure. The modern version was aided by “the Rockefellers wanting to stick it to the Morgans” by advocating bank regulation in the 1930s, he said.
Policy makers are unlikely to take up Noreika’s proposal, because there remain deep worries that companies would use their banking operations to provide risky financing to in-house businesses, said Guy Moszkowski, a banking analyst at Autonomous Research.
“There has been concern, historically, that for banks owned by corporate enterprises there would be excessive lending into the corporate enterprise and its subsidiaries,” he said. “I suppose there are ways to control for that. But I think the fear has generally been that if you allow corporates to control banks, they’ll find ways around those prohibitions.”
Retailers have previously been stymied in their efforts to get into banking. When Congress passed the Gramm-Leach-Bliley Act in 1999, it prohibited regulators from approving certain thrift applications that had been submitted by companies including Wal-Mart. Gramm-Leach-Bliley is better known for repealing the Glass-Steagall Act, the Depression-era law that separated investment and commercial banking.
In 2005, Wal-Mart tried again. The company filed an application with the Federal Deposit Insurance Corp. to open what’s known as an industrial bank in Utah that would have allowed it to process credit card transactions without going through an outside financial firm.
Banks aggressively lobbied against Wal-Mart’s submission, arguing that the retailer would use it as a stepping stone to opening branches in its litany of stores and eventually dominating the industry. Amid the controversy, Wal-Mart pulled its application in 2007.
In recent years, bankers have been increasingly fretting that technology companies will disrupt their business. Speaking at the same conference as Noreika, U.S. Bancorp Chief Executive Officer Andy Cecere said Tuesday that tech firms have several advantages, including strong funding and familiarity with their users.
“That is something that we all have to be very cognizant of and make sure we don’t lose our place in that relationship,” Cecere said.
Almost half of banks and credit unions consider large tech companies such as Alphabet Inc.’s Google, Facebook and Apple Inc. to be a “significant threat,” according to a Infosys Finacle survey of 300 bankers released Wednesday.
In China, tech companies such as Alibaba Group Holdings Ltd. and Tencent Holdings Ltd. have already emerged as serious competitors to banks in offering online financial services.
Among Noreika’s arguments is that data from crises don’t bear out the dangers of commerce-tied institutions. He cited a study of thrifts during the savings-and-loan crisis, and also referred to the 2008 financial crisis demonstrating “there is nothing inherently safer about separating banking and commerce or traditional banking and investment banking.” Noreika is serving until President Donald Trump’s comptroller nominee Joseph Otting is confirmed by the Senate.
Noreika added that bank regulators can continue keeping the bank part of the business safe while the new financial entities spur competition, said Noreika. Small banks might find easier sources of local capital by tying themselves to other businesses, Noreika said, who was a lawyer for big banks before taking the government role. He plans to return to the private sector after leaving the OCC.
And here’s a line to give Wall Street pause: “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so.”