This week in London, BBVA hosted a roundtable at the Innovate Finance Global Summit. This year’s event, held at the historic City of London Guildhall, brought together forward-thinking global leaders from seed stage start-ups to global financial institutions and professional services firms.
The roundtable, hosted by BBVA’s Open Innovation team, explored the future of the financial services industry in a digital world dominated by big tech.
By their very nature, digital economies tend to favour big platform players fuelled by data and vast, global networks. Over the past 20-years, almost every area of people's lives - from work to play, and shopping to education - has been hugely changed by the advent of digitisation and the ubiquity of the internet.
Across society this has brought about many advantages including reduced costs for consumers, the emergence of entirely new sectors, increased efficiency and massive new forms of communication and social interaction.
How the big tech players have established control
However, the big tech players now have a tight grip over several markets. Those taking part in the event were told how netmarketshare estimates that today Google has over 70% global market share for internet search on desktop and over 85% on mobile. eMarketer also shows that Google and Facebook have a combined share of US advertising revenue of 56.8%.
One question the roundtable, which included employees from the European Space Agency, HSBC and the American Bankers Association, discussed what are the drivers behind this consolidation? BBVA Research points to three factors.
Firstly, network effects mean that users of platforms that connect them to content, businesses or other users, value it more highly the more people that are using it. This can result in a winner-takes-all scenario as everyone prefers to go to the firm with the largest network.
Secondly, the big tech companies are now ‘gatekeepers’ to other markets and have the power to restrict information and content from consumers, including competitors’ products.
Thirdly, one potential concern raised was a view that because of the vast quantities of data that the tech giants now have at their fingertips, it allows them to improve their products or offer new services before smaller start-ups can - simply because they do not have the same level of insight into their target market.
The round table took place at the emblematic Guildhall building, in the heart of London's City.
Collaborate, challenge, or do nothing?
In such an environment and with big tech increasingly looking for opportunities in the financial sector, how should incumbent financial services players and start-ups react?
This is a question Derek White, global Head of Customer Solutions at BBVA, addressed at Money 20/20 Asia earlier this month. White´s argument was that the banking industry needs to continue to evolve and move more into the space that big tech firms currently occupy, if it is to survive.
For BBVA it is about becoming more involved in people's lives and offering them greater value and insight around both their money, and the data their financial interactions create. It’s also about continuing to build trust between the customer and the bank, because the more that trust is fostered, and the more value that banks can give back to the customer by helping them better understand their data, the more banks will be able to do for the customer.
One suggestion many of the roundtable participants agreed on was that big tech will want to collaborate with banks in the future to monetise the data they own. However there could be a problem here, the participants noted, because there is an increasingly lack of trust about how big tech companies handle consumer’s financial information. People still have real concerns about security and privacy, understandably fuelled by data breaches – Cambridge Analytica being the most recent example - and banks might be less willing to work with big tech in this environment.
In addition to the questions around working or not working with big tech, another suggestion from the panel was that large financial institutions need to become more bullish in challenging big tech.
To do this, they will need to get better at collaborating with start-ups. While BBVA moved ahead of the game in opening up a range of its APIs last year - well ahead of the PSD2 directive - many banks still do not have the capacity or the expertise to build and leverage this APIs revolution. This is where they will most need support from the fintech start-ups ecosystem because agile innovation is in their DNA.
Unsurprisingly, no-one around the table strongly advocated that global financial institutions do nothing. Banks must innovate to survive and continue to offer customers a better and more integrated service. But increasingly the way in which that service will be provided will be based around deeper collaboration and the creation of mutually beneficial financial ecosystems where banks act as a secure hub.
However perhaps the strongest take away from the session was that as the trust big tech has with its customers is gradually eroded through a combination of exploitation and privacy breaches, banks must work to ensure this does not happen to them. And that will require a new way of working with data, managing it, protecting it and sharing the value of it with all parties involved in a more symbiotic way.