Consumer banks face disruption from tech giants

Tech giant Google’s foray into consumer banking is a negative for U.S. financial firms, says Moody’s Investors Service.

In a new report, the rating agency warned that plans by Google’s parent company, Alphabet Inc., to launch digital bank accounts within the Google Pay app in the coming year will ramp up competition for deposits.

The move is regarded as a negative for traditional banks because consumer deposits are their primary funding source, Moody’s said.

“Over time, increasing competition could raise deposit costs, pressure deposit fees and increase the need for banks to invest in emerging technology to attract or maintain customers,” the rating agency said.

“Failure to respond risks driving shifts in market share to those banks who best meet customer expectations,” Moody’s noted.

Moreover, the Google news points to the existential threat posed by big tech companies.

Moody’s said that the launch of bank accounts within Google’s payment app “is an example of big tech’s expansion into retail financial services. It capitalizes on the rising popularity of digital wallets, an example of the widening application of digital innovations in financial services that we expect will continue to drive disruption across banking.”

This disruption intensifies the pressure on traditional banks to innovate to keep pace.

“With the accelerating use of mobile payments and rising popularity of single-click digital wallets, incumbent banks need a strategy to stay in the customer-facing part of the payments business,” Moody’s said.

Alphabet’s expansion into retail financial services distribution, which will involve partnering with existing banks, also “demonstrates the increasingly low barriers to entry for firms with large existing customer bases to distribute consumer financial services including deposit offerings,” Moody’s said.

“The launch also provides a blueprint for other firms with large existing customer bases keen to capture an increasing share of consumer activity and build customer loyalty. Increased user engagement enables these firms to capture valuable data and boost revenue,” the rating agency noted.

Moody’s said that arrangements between banks and large consumer companies that see the banks give up control of a “large share of customer relationships pose the greatest risk to incumbent financial institutions.”

These arrangements would also increase the possibility of large tech firms more permanently displacing traditional banks that “fail to execute timely, effective digital strategies.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.