Plug and pay

Big Tech takes aim at the low-profit retail-banking industry

Silicon Valley giants are after your data, not your money

The annual Web Summit in Lisbon each year is Woodstock for geeks. Over three days in November, 70,000 tech buffs and investors gather on grounds the size of a small town. Rock stars, like Wikipedia’s boss or Huawei’s chairman, parade on the main stage. Elsewhere people queue for 3d-printed jeans or watch startups pitch from a boxing ring.

Money managers announce dazzling funding rounds. Panellists predict a cashless future while gazing into a huge crystal ball. A credit-card mogul dishes out company-coloured macaroons.

Yet the hype conceals rising nervousness among the fintech participants. After years of timidity Big Tech, with its billions of users and gigantic war chest, at last appears serious about crashing their party. “It’s the one group everyone is most scared about,” says Daniel Webber of fxc Intelligence, a data firm. Each of the so-called gafa quartet is making moves.

Amazon introduced a credit card for underbanked shoppers in June; Apple launched its own credit card in August. Facebook announced a new payments system on November 12th (its mooted cryptocurrency, Libra, however, has lost many of its backers and will face stiff regulatory scrutiny). The next day Google said it would start offering current (checking) accounts in America in 2020.

Individually, each initiative is relatively minor, says Antony Jenkins, a former boss of Barclays, a bank, now at 10x, a fintech firm. But together they mark the acceleration of a trend that could reshape the finance industry.

The gafas have long had an interest in finance. Yet until recently they focused on payments, each in its own way. Apple Pay and Google Pay are digital wallets: they hold a digital version of cards but do not process transactions. Neither charges merchants a fee. They simply store everything in one place and make payments more secure by masking customer details. Google collects transaction data; Apple does not. Otherwise holding a phone over a contactless terminal is the same as tapping a card.

Facebook Pay stores card details for use on the group’s various apps (Facebook, Messenger, Instagram and WhatsApp) so customers need not enter them every time. Amazon Pay does the same, and also saves card details for payments on partner websites. Uniquely, it “processes” payments, a task others leave to specialist firms. When a purchase is made through Amazon Pay, it asks the card issuer if there are sufficient funds. If the answer is yes, the shop releases the goods (the money itself generally moves at the end of the day).

What these systems share is their limited success. After eight years Google Pay has just 12m users in America, a market of 130m households. Only 14% of the country’s households with credit cards use Apple Pay at least twice a month. In October the number of customers who used Amazon Pay was just 5% of the number who used PayPal, says Second Measure, a data firm.

This contrasts with the explosive growth of WeChat Pay and Alipay, China’s “super-apps”.

These allow shoppers to pay for nearly anything, from tea to taxis, by scanning a qr code. Launched in 2013, they have over a billion users each. They process transactions worth a third of China’s consumption spending and are now big lenders in their own right (see chart).

But the comparison is unfair. China was able to leapfrog the world because of permissive regulation and a lack of existing digital-payment methods. The rich world already had a decent credit-card system, points out Aaron Klein of Brookings, a think-tank, limiting the appetite for novel solutions. Financial red tape also binds more tightly in the West. To operate as payment institutions across America, newcomers need a licence in every state.

That makes the gafas’ move into retail banking even more puzzling. Since the financial crisis, credit provision has become one of the world’s most regulated activities. That constrains returns on capital and profits. Western lenders’ valuations are a fraction of tech firms’, notes Sankar Krishnan of Capgemini, a consultancy. Why would Big Tech want to be a bank?

The answer is twofold. The tech giants may not yet know exactly what they want, says Martin Threakall of Modulr, a fintech. Silicon Valley likes to place bets and see what sticks. And they probably do not actually want to be banks—as long as consumers do not notice.

At bottom, a bank is a balance-sheet, a factory that turns capital into financial products (eg, loans and mortgages) and a sales force, says Dave Birch of Consult Hyperion, a consultancy.

The first two are heavily regulated, and Big Tech is uninterested.

That is why the giants have turned to banks to do the tedious bits. Apple’s card is issued by Goldman Sachs, and Amazon’s ones by Chase, Synchrony and American Express. Google’s accounts are backed by Citi and a banking union.

Rather, the tech giants covet distribution. Their smarter systems and lack of branches should enable them to strip costs out, says Tara Reeves of omers Ventures, the venture-capital arm of a Canadian pension fund. More important, selling banking products should lead more people to use their payment systems.

Apple and Google want one more reason for consumers to “keep their phone under the pillow at night”, says Lisa Ellis of MoffettNathanson, a research firm. Amazon wants payments in-house so users never leave its app.

But above all, the gafas want data. They are already good at inferring consumers’ preferences from browsing patterns and location. But spending patterns are more useful. They could be used to assess ads’ performance or promote products. An investor says tech giants could even start dispensing financial advice.

It may take them some time to get there. Current accounts are “sticky”: according to Novantas, a financial consultancy, only 8% of American retail customers switch bank each year. Yet they should enjoy having more choice. Free perks and a great user experience could sway them, especially if they know that a bank is in charge of the sensitive bits.

Lenders will also welcome Big Tech—at least initially. Distribution accounts for half of operating costs at America’s typical retail bank, says Gerard du Toit of Bain, a consultancy. Tying up with a gafa would be a neat way to access new deposits, a cheap source of funding.

Yet as Big Tech starts to own consumer relationships, banks could lose clout. They may be forced to give away more data and fees, says Andrei Brasoveanu of Accel, a venture-capital firm. They could end up akin to utilities, providing low-margin financial plumbing. Squeezed profits could lead to a wave of mergers and closures. Digital upstarts will also feel the heat, especially if Big Tech cross-subsidises its financial offerings.

Regulators have so far seen new entrants in financial services as a welcome catalyst for the innovation banks have failed to foster. That could change if the giants charge in. At the Web Summit Margrethe Vestager, the European Union’s competition commissioner and a gafa sceptic, mused about the risks to democracy if tech firms become too powerful to oversee and regulate.

“We can reach for the potential,” she told the amped-up audience in Lisbon. “But we can also do something to control the dark sides.”

Why Financial Markets’ New Exuberance Is Irrational

Owing to a recent easing of both Sino-American tensions and monetary policies, many investors seem to be betting on another era of expansion for the global economy. But they would do well to remember that the fundamental risks to growth remain, and are actually getting worse.

Nouriel Roubini

roubini134_JOHANNES EISELEAFP via Getty Images_USstockmarkettrader

NEW YORK – This past May and August, escalations in the trade and technology conflict between the United States and China rattled stock markets and pushed bond yields to historic lows.

But that was then: since then, financial markets have once again become giddy.

US and other equities are trending toward new highs, and there is even talk of a potential “melt-up” in equity values.

The financial-market buzz has seized on the possibility of a “reflation trade,” in the hope that the recent global slowdown will be followed in 2020 by accelerating growth and firmer inflation (which helps profits and risky assets).

The sudden shift from risk-off to risk-on reflects four positive developments.

First, the US and China are likely to reach a “phase-one” deal that would at least temporarily halt any further escalation of their trade and technology war.

Second, despite the uncertainty surrounding the United Kingdom’s election on December 12, Prime Minister Boris Johnson has at least managed to secure a tentative “soft Brexit” deal with the EU, and the chances of the UK crashing out of the bloc have been substantially reduced.

Third, the US has demonstrated restraint in the face of Iranian provocations in the Middle East, with President Donald Trump realizing that surgical strikes against that country could result in a full-scale war and severe oil-price spike.

And, lastly, the US Federal Reserve, the European Central Bank, and other major central banks have gotten ahead of geopolitical headwinds by easing monetary policies.

With central banks once again coming to the rescue, even minor “green shoots” – such as the stabilization of the US manufacturing sector and the resilience of services and consumption growth – have been taken as a harbinger of renewed global expansion.

Yet there is much to suggest that not all is well with the global economy.

For starters, recent data from China, Germany, and Japan suggest that the slowdown is still ongoing, even if its pace has become less severe.

Second, while the US and China may agree to a truce, the ongoing decoupling of the world’s two largest economies will almost certainly accelerate again after the US election next November.

In the medium to long term, the best one can hope for is that the looming cold war will not turn hot.

Third, while China has shown restraint in confronting the popular uprising in Hong Kong, the situation in the city is worsening, making a forceful crackdown likely in 2020.

Among other things, a militarized Chinese response could derail any trade deal with the US and shock financial markets, as well as push Taiwan in the direction of forces supporting independence – a red line for Beijing.

Fourth, although a “hard Brexit” may be off the table, the eurozone is experiencing a deepening malaise that is not related to the UK’s impending departure. Germany and other countries with fiscal space continue to resist demands for stimulus.

Worse, the ECB’s new president, Christine Lagarde, will most likely be unable to provide much more in the way of monetary-policy stimulus, given that one-third of the ECB Governing Council already opposes the current round of easing.

Beyond challenges stemming from an aging population, weakening Chinese demand, and the costs of meeting new emissions standards, Europe also remains vulnerable to Trump’s oft-repeated threat to impose import tariffs on German and other European cars.

And key European economies – not least Germany, Spain, France, and Italy – are experiencing political ructions that could translate into economic trouble.

Fifth, with crippling US-led sanctions now fueling street riots, the Iranian regime will see no other choice but to continue fomenting instability in the wider region, in order to raise the costs of America’s current approach.

The Middle East is already in turmoil. Massive protests have erupted in Iraq and Lebanon, a country that is effectively bankrupt and at risk of a currency, sovereign-debt, and banking crisis.

In the current political vacuum there, the Iranian-backed Hezbollah could decide to attack Israel.

Turkey’s incursion into Syria has introduced many new risks, including to the supply of oil from Iraqi Kurdistan.

Yemen’s civil war has no end in sight.

And Israel is currently without a government. The region is a powder keg; an explosion could trigger an oil shock and a renewed risk-off episode.

Sixth, central banks are reaching the limits of what they can do to backstop the economy, and fiscal policy remains constrained by politics and high debts.

To be sure, policymakers could turn to even more unconventional policies – namely, monetized fiscal deficits – whenever another downturn occurs, but they will not do so until the next crisis is already severe.

Seventh, the populist backlash against globalization, trade, migration, and technology is worsening in many places. In a race to the bottom, more countries may pursue policies to restrict the movement of goods, capital, labor, technology, and data.

While recent mass protests in Bolivia, Chile, Ecuador, Egypt, France, Spain, Hong Kong, Indonesia, Iraq, Iran, and Lebanon reflect a variety of causes, all are experiencing economic malaise and rising political resentment over inequality and other issues.

Eighth, the US under Trump may become the biggest source of uncertainty.

Trump’s “America First” trade foreign policies risk destroying the international order that the US and its allies created after WWII. Some in Europe – like French President Emmanuel Macron – worry that NATO is now comatose, while the US is provoking rather than supporting its Asian allies, such as Japan and South Korea.

At home, the impeachment process will lead to even more bipartisan gridlock and warfare, and some Democrats running for the party nomination have policy platforms that are making financial markets nervous.

Finally, medium-term trends may cause still more economic damage and disruption: demographic aging in advanced economies and emerging markets will inevitably reduce potential growth, and restrictions on migration will make the problem worse.

Climate change is already causing costly economic damage as extreme weather events become more frequent, virulent, and destructive.

And while technological innovation may expand the size of the economic pie in the long run, artificial intelligence and automation will first disrupt jobs, firms, and entire industries, exacerbating already high levels of inequality.

Whenever the next severe downturn occurs, high and rising private and public debts will prove unsustainable, triggering a wave of disorderly defaults and bankruptcies.

The disconnect between financial markets and the real economy is becoming more pronounced.

Investors are happily focusing on the attenuation of some short-term tail risks, and on central banks’ return to monetary-policy easing.

But the fundamental risks to the global economy remain.

In fact, from a medium-term perspective, they are actually getting worse.

Nouriel Roubini, Professor of Economics at New York University's Stern School of Business and Chairman of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is

The Winners and Losers in the 2020 EU Budget

By: Allison Fedirka

It’s budget season in the European Union, and that means competing interests among the bloc’s different economies are on full display.

The conversations taking place now over the 2020 budget, which was finalized just this week and is expected to be approved next week, will shape the framework for the bloc’s next seven-year budget, talks over which are currently underway.

The key points of contention will be member contributions and spending priorities.

A final agreement on the 2021-27 budget will be drafted in the not-too-distant future, but the results of the 2020 budget discussions provide some insight over what lies in the EU’s financial future – namely, more fragmentation.

Finding Common Ground

With the global economy slowing down, the EU needs to show it has not only economic value but political value as well.

Its response to the 2008 financial crisis and multiple aftershocks – which resulted in high unemployment rates and high debt levels for many of the bloc’s members – stoked nationalist sentiments that clashed with the pro-EU stances of the parties that were in power at the time.

The main question was whether the EU did more harm than good for its member states.

As a result, the EU now faces a greater sense of urgency than it did in the past to reach consensus on key issues; it needs member states to buy in to agreements even if these agreements don’t address the root causes of the problems the members are facing.

But doing so is becoming increasingly difficult.

Just two days before the EU reached an agreement on the 2020 budget on Nov. 18, major players like Germany expressed doubt over whether a deal could be reached – a worrying prospect considering that, if a budget was not drafted by Nov. 19, the European Commission would have to go back to the drawing board.

EU budget commissioner Guenther Oettinger acknowledged that not having a budget in place by Jan. 1 would put Europe in a more “difficult economic and geopolitical situation.”

When similar impasses came up in the past, member states’ commitments to EU funding diminished, and that’s precisely the type of thing the EU wants to avoid as it tries to counter the idea that enforcement of EU rules stirs up discord and conflict within member states.

The core issue in the budget discussions is finding common ground on how to address the social and economic problems facing EU member states.

The sensitivity around this issue explains why the EC has struck a cautious tone when reviewing country compliance on fiscal rules.

It has been careful in its approach to Germany, merely suggesting that prosperous countries should invest more to try to stave off a serious downturn. It has also shown caution in dealing with other heavy-hitters like France, Italy and Spain, saying these countries are “at risk of non-compliance” over their public debt levels (France and Spain currently have debt-to-GDP ratios of nearly 100 percent, while Italy’s stands at 136 percent) but stopping short of issuing severe criticism, direct orders for change or threats of punitive measures.

This approach shows that the EC understands the political pressures in each country – the Catalan separatist movement in Spain, the yellow vest protests in France and the recurring political standoffs in Italy – that are behind some of the economic choices these countries have made that put them at risk of non-compliance.

Encouraging these countries to make tough cutbacks that could have consequences for the wider population could lead some to question whether being an EU member is worth it in the first place – which could put the EU’s own future at risk in the long run.

Thus, the EU has been relatively lax in its enforcement of fiscal rules – lest it be accused of forcing problematic policies on members against their will.

The 2021-27 budget talks, however, will force the bloc to address head on many of its core challenges.

The talks will hinge on the size of the EU budget for the next seven years, the contributions from each member state and how funds are spent.

With 27 members at the negotiating table, it’s sure to be a heated debate.

Net contributors (Europe’s larger economies like Germany) want to reduce EU spending for the “new member states” of Eastern Europe and make sure they too see some benefit from their contributions – by, for example, addressing problems related to migration or the stability of the eurozone.

Net beneficiaries (including Eastern European countries) want to maintain the status quo.

Whereas previous seven-year budgets prioritized efficiency and development for the bloc as a whole, the next long-term budget will reflect the divisions that have emerged as the political and economic needs of the member states have diverged.

For clues into what these divisions might be, look no further than the 2020 budget.

Winners and Losers

Before we examine the 2020 budget itself, we need to understand the broader geopolitical context within which it was negotiated. Since the 2008 financial crisis, the future of the European Union has repeatedly been questioned.

The crisis brought to the fore the monumental challenge of running a monetary union without having complete control over the economies of its members.

National interests were at times pitted against the bloc’s interests, and this ultimately sowed the seeds of disunion within the bloc.

Having to bail out Greece and usher Italy through its banking crises sparked doubts about the eurozone’s utility and that of the whole EU.

External issues – like the rise of the Islamic State, civil war in Syria and the influx of hundreds of thousands of migrants – compounded these problems, particularly for countries like Germany and France that have the largest financial burdens within the EU, whose economies are closely integrated with other members, and that were the main EU destinations for many migrants heading to Europe.

Indeed, as these issues arose, border security and free movement within the Schengen zone became another point of contention for member states.

As the 2020 budget, which will total 168.7 billion euros ($186 billion), was being negotiated, these issues came to the fore.

Information on individual members’ contributions isn’t yet available, but the changes in spending by category indirectly reveal who is calling the shots and what their priorities are.

In comparison to the 2019 budget, the 2020 budget provides more funding for youth employment, migration integration and support, security, growth and competitiveness.

This reflects the priorities of the EU’s largest contributors: France, Spain and Italy have struggled to reduce youth unemployment rates (which register at 19 percent, 32 percent and 27 percent respectively), and Germany and Italy have both faced internal political pressures resulting from the growing number of immigrants in their countries.

All of these members want to stimulate their sluggish economies by enhancing tech development and increasing competitiveness of their goods. (Germany narrowly avoided a technical recession, producing 0.1 percent growth in the third quarter after displaying negative growth in the second quarter.)

Areas that will likely see a decline in funding include infrastructure, agriculture (save for research) and social inclusion. Eastern European countries on the whole are less developed than Western European countries and would be particularly hard hit by declines in spending on infrastructure and social inclusion, which includes, among other things, programs for the economically vulnerable, unemployment, basic services, income inequality and education.

While all members have veto power over the budget, Eastern European countries don’t want to perpetually hold up the bill since, as has happened in the past, this would risk a drop in funding commitments and further exacerbate political differences.

Their needs diverge from those of larger, richer European countries that have an upper hand in appropriating funds and are using it to focus spending on their own concerns.

To what degree other spending categories will be affected won’t be known until the final documents are released.  

But as with all budgets, there will be winners and losers, and the EU’s main contributors are more likely to tip the scale in their favor now more than ever, given the current economic climate. 

Between the political shifts evident in the 2020 budget and the bleak economic outlook, tensions in EU budget talks will only intensify.

In addition to the economic uncertainty, other major problems loom on the horizon.

The question over how to fill the void left by the U.K.’s departure will have huge impacts on the next seven-year budget.

(The U.K.’s net contribution to the EU in 2018 totaled roughly $14 billion, or about 8 percent of the budget.)  

In addition, think tank Copenhagen Economics recently released a report warning that European banks might need an infusion of up to 400 billion euros to comply with new financial regulations.  

Not only is Europe entering a new period of economic uncertainty, but it’s doing so from a weaker starting point than it did 10 years ago.

The 2021-27 budget talks will be an indicator of the forces that are likely to drive a wedge in the EU for years to come.