Tech Titans: No threat to banks

While the powerful tech titans have a competitive edge over new entrants and upstart fintechs, S&P Global remains unconvinced that GAFAs - Google, Apple, Facebook, and Amazon - pose a threat to the banks, at least in the short term.

The ratings firm says the banks will feel only limited short-term pressure on their transaction fee income as they look set to benefit from the good medium-term growth in card-based payments.

This is despite the recent growth of e-wallets and alternative payment methods.

“We expect that tech titans' lending activities will remain targeted to merchants operating on their platforms and to segments currently underserved by banks due to profitability and capital reasons,” said S&P credit analyst, Paul Reille.

“Similarly, we believe that regulation will limit tech titans' ability to compete meaningfully with banks over customer deposits.

Blocked by regulators

In the long term, he added, regulation is likely to remain a key factor deterring tech titans' efforts to increasingly offer the full financial services suite currently provided by banks.

“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.”

On the payments front, S&P believes the threat from the ‘Pays’ is limited because the total volume of e-commerce and POS transactions processed through mobile payment services remains low compared to the total amount of transactions processed through debit or credit cards.

Moreover, while Apple has successfully negotiated with US and UK-based banks the right to receive a fixed percentage of all transaction fees processed via their phones; other digital wallet providers, such as Android Pay, are currently not charging any credit card issuer fees.

“In our opinion, recent declines in interchange fees rather than competition from new tech entrants' has had a more negative effect on banks' transaction revenues,’ Reille argued.

Changing landscape

However, the S&P analyst acknowledged the major changes underway in Europe which could change things in the longer term.

In the UK, the Competition & Markets Authority has triggered a fundamental reshaping of the UK’s digital financial industry ecosystem through the Open Banking regulation.

And in the EU, the PSD2 (Revised Payment Services Directive) regulations—which came into force last week —require banks to open their systems to third parties, and provide interfaces for them to initiate payments and retrieve account information.

According to Reille, this means external parties like the Pays could begin to initiate payments on behalf of customers using their smartphones to shop online or in retail stores.

“This regulation might be the starting point for a transition from a card payment model to an account-based model, with some adjustments to the value chain in payments processing and to the amount of fees that banks can receive from transactions.

“While it is possible to see the Pays transition to this type of model - where they would use a customer's bank account information to initiate transactions on their behalf - the challenge will be to see to what extent they can find ways to monetize these types of transactions.”

Fundamental shift

In his opinion, for the impact on bank transaction revenues to be material, a fundamental shift would need to happen - away from card to mobile payments for e-commerce and POS transactions - in Europe and North America.

Additionally, he went on to say, e-wallet providers would either need to apply more aggressive fees charged per card transaction or would likely need to connect directly to banks and merchants (which might result from PSD2) rather than utilize the Visa and Mastercard networks.

“Overall, we still expect card usage to be the preferred medium of payment for POS and e-commerce transactions in Europe and North America in the short to medium term.

“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.

According to S&P, 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 per cent of total revenues.

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