One could arguably say that we are reaching the pinnacle of the Internet revolution. Our information flows efficiently across the globe and in real-time, we have a plethora of information available at our fingertips. Perhaps, the best example would be the accomplishments of tech giants like Google, Amazon, Facebook, etc. and the most recent innovation – cryptocurrencies.
We might be able to reach this said pinnacle when legacy methods and instruments used in finance are replaced by the ones being developed under the new revolution. Perhaps, this is the reason why tech companies like Apple, Google, Facebook and others like it are making their way into finance; a sector that could be thought of as the ‘final frontier’ of this revolution.
Co-Founder and Data Scientist at D5 – The Data Science DAO, Alexander Svanevik, spoke to AMBCrypto about this movement. He said,
“Regulatory changes (e.g. PSD2) are likely the major driver. Furthermore, the financial industry is ripe for disruption, as most people in crypto would agree. Big tech will offer radically improved user experiences.”
Finance: The Final Frontier
The latest revolution has reshaped the way we interact with data. Simultaneous improvement of technology has allowed the revolution to be propagated even further. However, one serious aspect of our daily lives did not witness an equal and lasting impact – finance. Although financial data moves instantly, the physical relocation of money across borders is still limited.
Global trade, which is one of the main vectors of financial development for countries around the world, is suffering major drawbacks due to various inefficiencies, specifically, in finance. Most SMEs over the world do not even have an opportunity to participate in the trade. In addition, 1 out of 4 people in the U.S are unbanked. Perhaps, the Googles and Apples of the tech world understand this and have started their foray into finance. Worldwide, about 2 billion are unbanked, according to the World Bank’s Global Finance Index, which is a humungous number in a world where people can easily connect using the Internet. This further proves how the financial sector badly needs a makeover.
Facebook began as a way to connect with people and share photos. However, it now has serious plans to launch its own currency, Libra.
Source: Juniper Research
Both Apple and Google have already launched their own payment methods, Apple Pay and Google Pay, apps that are being used by millions of users across the world. Moreover, these numbers are only projected to vastly improve in 2020.
Although tech companies have just begun their foray into finance, they’re already in deep.
Source: BIS Annual Economic Report 2019
The Catalyzing Agent: Bitcoin
The move of tech companies into the world of finance was catalyzed by two events – the 2008 – 2009 recession, followed by the advent of Bitcoin. The recession shook all faith in government and Bitcoin was the savior that followed this in the coming years, giving people an alternative way to conduct commerce. Bitcoin, apart from providing opportunities to people, also paved the way for the development of a new industry – the cryptocurrency industry. Among this industry, there is a development of decentralized finance and other sectors individually on a race to bank the unbanked. Moreover, with the help of cryptocurrencies, it is now possible to move money in a matter of seconds, as opposed to the days when the same was done using traditional methods.
Seeing this, naturally, tech companies would want a piece of this industry. JP Morgan, a major bank opposed to cryptocurrencies, for instance, came around to suggest an idea to develop its own cryptocurrency. There is a trend where major companies are either developing their own cryptocurrencies or they are trying to use blockchain to solve a problem in the traditional financial industry. This is where major technology companies are coming to play.
Alexander Svanevik believes that Bitcoin played a role in this, but not as huge. He added,
“Bitcoin has made people open up to the idea that financial services don’t necessarily have to be provided by banks. Having said that, I don’t believe Bitcoin has played a big role in making big tech move into finance (with the exception of Facebook’s Libra). Moving into financial services is simply the natural next step…”
Doing it for the Data
Two reasons can be thought of for the move of tech companies into finance. The first being that finance is an untapped industry and can be exploited; the second is in conjunction with the first – data. In this era of information, the person who holds the most data, analogous to gold in the industrial revolution, wins. The second reason is that tech companies are doing it for the data.
In addition to the above, tech companies have advantages and can reinforce their existing network of data-network-activities loop and partnerships to foray into payments, money management, insurance, and lending.
According to the BIS’ Annual Economic Report 2019, 46.2% of the tech companies’ revenues are from the Information Technology [I.T.] sector. Financial services represent only 11.3% of their revenue.
Source: BIS Annual Economic Report 2019
Amazon, Facebook, Google, Apple, Samsung, etc., all of these companies started out as something different but eventually, they started adding things around their existing infrastructures. As time went on, the data they collected became more useful and hence, the final frontier, so-to-say, is finance. The ways in which people interact with their banks have fundamentally changed and hence, tech companies are ready to pitch-in to this changing narrative and enjoy mutual benefits.
Big tech’s entry into finance is due to 3 main reasons – data, network, and interwoven activities that reinforce each other. Financial services not only benefit from these 3 reasons, but also fuel them. With growing concerns, tech giants’ foray into finance has been received with grace and concern; tech giants provide much-needed competition and an upgrade from the legacy system, but it is also a source of concern due to privacy issues.
