Apple card? Google checking account? Why Big Tech wants to be your banker.

Why We Wrote This

For all its status as home to world-leading tech companies, the United States is behind the curve in digital banking. As that changes, the result may be declining privacy but also rising convenience.

Jitendra Prakash/Reuters/File
A Sadhu or a Hindu holy man pays a vendor through Paytm, a digital wallet company, after buying a book during an annual religious festival in Allahabad, India, on Jan. 26, 2017.

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Google set off furious speculation this month when it said it would team up with Citigroup and a small California credit union to offer checking accounts. Will Google take over finance the way it dominates internet search? Will it marry financial information with its own search data to blanket people with ever more targeted marketing?    

The reality for now is more modest, some analysts say. The tech giant may be looking for ways to boost interest in its existing mobile payment app, Google Pay, which lags behind Apple Pay and is doing much better in India than in the U.S.

But the direction is clear. Finance is going digital. Nearly 3 in 4 consumers in East Asia last year used mobile wallets for in-store payments. If the rising role of high-tech firms brings worries about declining consumer privacy, the flip side is convenience – like apps that guide consumers toward good shopping deals based on their location.

“Think of it as applying artificial intelligence to the banking system,” says finance expert James Angel of Georgetown University. “The more data it has, the more things it can do.”

The American pocketbook is quickly becoming obsolete, by global standards. 

Weighed down by credit cards and checkbooks, the nation’s payment system can’t keep pace with developing nations’ alternative, where consumers pay with smartphones and send and receive money in minutes instead of days.

Sensing an opportunity to diversify and use their digital savvy to modernize a tradition-bound industry, America’s biggest high-tech firms are expanding into finance with everything from digital wallets to credit cards and even checking accounts.

“That’s going to be a natural next step for these companies to grow,” says Dan Ives, an analyst at Wedbush Securities, which is based in Los Angeles. “It’s part of an arms race right now going on between tech companies trying to further expand their tentacles outside their core competency – from Apple to Amazon to Facebook to Google, across the board.”

The movement, started about a decade ago, is picking up speed. Other new entrants, so-called neo or challenger banks, are also shaking up the industry with new products that traditional financial players are rushing to counter with their own offerings. All this points to a world where people will use smartphones instead of plastic for purchases and ditch paper checks to make instant payments to friends and businesses.

“The environment has changed dramatically and banks can no longer sit on their laurels,” says Thad Peterson, a senior analyst at Aite Group, a Boston-based global research and advisory firm. “With real-time payments ... there’s no reason why you couldn’t pay your employees daily rather than biweekly. And suddenly you can start to think about how the money movement will be very different.”

The latest tech-based rumblings have come from Google, which earlier this month announced it would team up with Citigroup and a small California credit union to offer checking accounts next year. Containing few details, the announcement set off furious speculation: Will a Google bank take over finance the way it dominates internet search? Will Google marry financial information with its own search data to blanket consumers with ever more targeted marketing?   

Eric Risberg/AP/File
A cash register terminal promoted usage of the then-new Apple Pay mobile payment system at a Whole Foods store in Cupertino, California, on Oct. 17, 2014. Apple and Google are among the tech companies venturing increasingly into finance, often with partners from the banking industry.

The reality, in the short term at least, may be more modest, several analysts say. Alphabet, Google’s parent company, may be looking for ways to boost interest in its existing mobile payment app, Google Pay, which as of estimates last year had only about 11 million users in the United States. That’s half of what Apple Pay had – and a sixth of the Google Pay users in India.

Apple has not stood still, either. In August, it launched an Apple Pay credit card with its partner, Goldman Sachs, which has become the preferred payment system for many Apple fans. The app offers cash back rewards of 1% to 3% on purchases, which are credited on the same day. It also provides visual budgeting and spending guides as well as tight integration with the Apple iPhone, making mobile payments with the press of a few buttons.

“Used [Apple] Pay for the first time at @myfamilydollar. Worked out great,” tweeted consumer David Becker last week. “I have no idea why places like @DollarGeneral don’t accept it? It’d make me go there even more. But for now, when it comes to dollar stores, @myfamilydollar has my business.”

Still, Apple’s success is modest when compared with expectations when it first launched Apple Pay in 2014. For all the talk of payments by mobile phones, Americans and Europeans still rely primarily on credit cards for in-store purchases, according to Juniper Research. By contrast, nearly 3 in 4 consumers in East Asia last year used mobile wallets for such payments, thanks to the success of Alipay, the online payment system of Alibaba, China’s e-commerce system, and Ratuken Edy, Japan’s electronic money card. Many U.S. tech companies are watching them closely. 

“China is a blueprint to where many of them want to go,” says Mr. Ives of Wedbush. “But I don’t expect it to be the same trajectory.”

The pace of announcements is picking up. In October, Uber said it planned to launch Uber Money as a way for its users to pay its drivers directly. In the same week Google made its checking account announcement, Facebook introduced Facebook Pay, a feature that will allow its users to pay for merchandise directly on its social media platforms as well as send and receive money from friends. 

The effort is separate from Facebook’s far more ambitious effort announced this summer to create its own digital cryptocurrency, which would compete with Bitcoin. That plan has come under withering scrutiny from lawmakers and regulators alike in Washington, concerned about privacy, money laundering, and a currency outside the control of governments. Several key financial partners have dropped out of the project.

And partners seem to be key. By teaming up with existing banks and other financial institutions, the high-tech giants won’t have to bother with all the regulatory plumbing that comes with financial transactions. The partnerships offer tech firms a better chance of avoiding such government scrutiny. Even Amazon, which is the leader in the U.S. in integrating digital commerce with transactions, including credit cards and even cash advances to its merchants, is partnering with Synchrony Bank to offer its card. 

“The bigger concern will be data and data privacy and how the data will be used,” says Ron Shevlin, research director at Cornerstone Advisors, a banking consultancy. Purchase and even search data can yield important clues about consumers, so high-tech companies will have to be transparent about how and when they use it.

Eventually, forays into finance could pay off in new services, analysts say, whether it’s helping banks make better loans or creating something unique to attract new customers. 

“Imagine your personal financial assistant, who basically keeps track of your spending but also integrates with other information on your life,” says James Angel, a finance professor at Georgetown University’s McDonough School of Business. Because it knows your location, it can tell what store you’re in, guess what you’ll buy, and alert you to places that sell it cheaper. Or it might warn you not to enter a particular store because your bank account is particularly low.

“Think of it as applying artificial intelligence to the banking system,” Professor Angel says. “The more data it has, the more things it can do.”

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