CX-hdr-2018

Alexa, what’s the rate on my home loan? Big tech's CX-driven move into financial services

Global big tech companies have dipped their toes in the water with payments and some in China are now expanding into the provision of credit, insurance, savings and other investment products, either directly or in cooperation with established financial institutions.

With the exception of Netflix, the so-called FAANG companies (Facebook, Amazon, Apple, Netflix, and Google) and their Chinese counterparts BAT (Baidu, Alibaba, Tencent), are all exploring or offering financial services.

Facebook has its new cryptocurrency Libra, Amazon has its micro-lending business, and Apple and Google have their payments services.

Chinese companies are even more advanced when it comes payments. For example, Tencent has its payment giant WeChat, as well as digital bank WeBank and insurance platform WeSure as well as numerous other subsidiaries including Tencent Investment, its investment arm.

According to a paper published by the Bank for International Settlements this year, the key advantage Big tech companies have is what the BIS calls DNA – the ‘data-network-activities' loop.

Big tech’s DNA gives a CX edge

It all starts with the masses of data these companies accumulate. That data is then used as an input to services that rely on the network and generates activities which in turn create more data, thus closing the loop.

According to the BIS, financial services both benefit from and fuel the DNA loop.

Take payments for example, which is often the first financial service that Big tech will make a foray into.

Payment transactions do not exist in a vacuum, they generate data that details the links between payers and payees.

That data can then be used to enhance customer experience by enabling more targeted advertising and thus greater personalisation as well as additional financial services such as credit scoring.

BIS notes that the type of synergies varies with the nature of the data collected.

“Data from e-commerce platforms can be a valuable input into credit scoring models, especially for SME and consumer loans,” BIS says. “Big techs with a large user base in social media or internet search can use the information on users’ preferences to market, distribute and price third-party financial services (eg insurance).”

So why haven’t big banks been able to create DNA loops? The main reason comes down to regulations, according to BIS.

While big banks do have large customer bases and provide a wide range of services, most jurisdictions have historically required a separation of banking and commerce.

As an aside, the law that enforced this in America was known as the Glass-Steagall Act, and it was passed in 1933 in the wake of the 1929 Great Depression. The GSA was later repealed in 1999 and this contributed to the 2008 Global Financial Crisis.

Since data is the starting point, it is worth considering the differences in the data that big banks and big tech have access to.

Although big banks have many years of verified and accurate customer data, most of it has been limited to transactions. In other words, there has been a lack of “soft” data. There is only so much you can glean from transactions, after all.

Big techs on the other hand have the opposite. They have a comparatively shorter history of data but they have a plethora of “soft data” such as our preferences, tastes, where we spent our last summer holiday, how many pets we own, and our favourite bands.

The result of this difference in  data is that big techs have the edge on big banks when it comes to personalisation. As they know us better, it stands to reason they can provide  a more tailored CX.

 

 

Risks and challenges

This is not to say that big tech’s entry into financial services will be smooth.

“Big techs’ role in financial services brings efficiency gains and lowers barriers to the provision of financial services, but the very features that bring benefits also have the potential to generate new risks and costs associated with market power,” BIS says.

BIS identifies three key risks brought about by big techs role in financial services.

The first is that they can create “captive ecosystems” which would see them engage in anticompetitive activities such as pushing their own products at the expensive of competing financial services.

The other again comes down to data. Questions around how customer data is used and stored is an ongoing concern worldwide and brings a whole range of potential problems such as data-driven discrimination or high-profile breaches.

The third is due to consumer preferences. As big techs knows so much about you, it is not inconceivable that they will use this data to influence your financial decisions.

For example, in 2012 Facebook covertly experimented with a group of users’ news feeds in order to see if they could manipulate them into posting either positive or negative things.  

Many were outraged by this study. Although Facebook itself told The Atlantic that the “actual impact on people in the experiment was the minimal amount to statistically detect it”, it isn’t hard to imagine the danger of such influence in the realm of financial services (ie, ‘I don’t know why but I just really want to buy this stock’). 

Regulatory hurdles

At present, the financial services industry is burdened by more regulations than big tech, which is causing some alarm as the lines between the two become blurred. The problem is on the radar of American politicians, with US Democratic Rep. Maxine Waters requesting in June that Facebook pause its development of Libra.

“Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action,” she said then.

This month, things got worse for Facebook with news that Visa, MasterCard, eBay, Paypal and payments startup Stripe had bailed on the Libra partnership, amid concerns of regulatory pushback in the US and abroad.

Also this month, the European Union’s finance commissioner pledged to propose new rules to regulate virtual currencies in direct response to Libra.

China too has made regulatory changes, passing laws that put restrictions on big tech companies’ money market funds and ensure that big techs keep 100% of customers balances in a reserve account with the nation’s central bank.

It is still early days

For its first century as a country, the US was in a “free banking” era, with little to no regulation. That all changed in 1863 with the passing of the National Banking Act, which was designed to create a national banking system and establish a national currency.

It took another 50 years for the Federal Reserve Act to be passed, which in 1913 created the first permanent central bank in what is now the world’s largest economy.

Now, a century later, it looks like another major shift in financial services is taking place.

The regulatory landscape is always evolving and such tectonic shifts not only take time but are also initially met with resistance. Facebook CEO Mark Zuckerberg may like to “move fast and break things”, but when he is dealing with the engine that is the economy, he might have to slow down.

If CX is truly the most important differentiator in this new age, then it makes sense that big tech will use their considerable advantages in this area to improve financial services. However, there is still much work to be done in understanding and mitigating the tradeoffs that exist across privacy, regulation, competition and data protection.

Fifth Quadrant is Australia leading CX consulting firm. We help companies in the financial services industry as well as other verticals including retail and automotive improve their CX with our research-based approach. To learn more, contact us today.

 

 

Stefan Kostarelis

Written by Stefan Kostarelis

Stefan is the Content Manager at a Sydney-based investor relations firm, and a freelance writer whose work has appeared in Techly, Paste Magazine, Lost at E Minor and Tech Invest.

Topics: Customer experience Finance CX Articles & Insights banking

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