Google goes into banking to take over company it lost to Amazon

Sundar Pichai, Managing Director of Google LLC, speaks during the Google Cloud Next ’19 event in San Francisco, California, United States, Tuesday, April 9, 2019.

Michael Short | Bloomberg | Getty Images

Google is getting into banking – but not with the same motives as Wall Street.

The tech giant will launch customer checking accounts next year in partnership with Citigroup and Stanford Federal Credit Union, a source familiar with the plan told CNBC.

Google’s primary motivation, analysts say, is customer data. Seeing what users are spending money on, the Mountain View, Calif.-Based company may be looking to get a head start in the online search battle with Amazon.

“Google is likely to enter into these partnerships to increase its knowledge of consumer buying behavior (and consumer finances more broadly),” Wells Fargo Internet analyst Brian Fitzgerald said in a note to customers on Wednesday. . Fitzgerald said the move was aimed at maintaining and expanding influence over consumer demand – a “key strategic priority” for the company.

Amazon owns 54% of U.S. product searches online, compared to Google’s 46% market share, according to a recent Jumpshot study. CB Insights Senior Intelligence Analyst Arieh Levi highlighted Google’s plan to brand checking accounts under the names of partner banks – not their own.

“This is a marked difference from Apple and others, and it shows that Google is focusing primarily on data to fuel its core advertising business, and less on acting as a bank in its own right. “, did he declare.

Checking accounts, first reported by the Wall Street Journal, will be accessible through Google Pay. Thousands of banks in the United States already offer virtual card transactions through Google Pay. By making the Google ecosystem and payments “more attractive,” customers are more likely to continue using the platform, according to Gerard du Toit, partner of Bain, who heads the banking and payments business of Bain’s Financial. Services in North America.

“For Google, the deposit account will help rigidity and additional access to data – customer data is what they make their money on,” du Toit said. “The motivation for these tech companies is not that they expect to make huge sums of money on payments, but because of what it brings in terms of consumer benefits and rigidity. “

The guide to attracting customers will likely include higher interest rates and some sort of cash back incentive to attract people to their existing bank, he said. Finally, de Toit expects Google to expand into credit cards as well.

“I would expect all of these big tech companies to go into financial services, it will be payment independent, whether it’s a credit card or checking account,” du Toit said. . “I would be surprised if, over time, they did not come up with an alternative. It is a Darwinian experiment that is successful.”

Google did not give details on interest rates or incentives, but a spokesperson said they “look forward to sharing more details in the coming months.” For now, the company “is exploring how we can partner with banks and credit unions in the United States to offer smart checking accounts through Google Pay” and helps its customers “to benefit from useful information and budgeting tools, while keeping their money in an FDIC insured account by the NCUA, ”the spokesperson told CNBC.

Less ‘controversial’ than credit cards

Apple, another tech titan, is also deepening its banking business with a Goldman Sachs-backed credit card. This week, top users complained that their spouses have been discriminated against, highlighting potential headaches in credit underwriting decisions. The bank said it was looking for ways to allow family members to share a single card. Ryan Gilbert, general partner of Propel Ventures, said checking accounts tend to be “less controversial” than credit cards since everyone is eligible – no credit check is necessary.

By starting with a checking account instead of a credit card, Google is making sure it doesn’t have to “disappoint” customers by not approving their creditworthiness, according to Bain’s du Toit.

There is a risk of disintermediation like Wall Street associates with big tech. For the banking industry, it seems like it’s a decision to beat them or join them as Apple, Amazon, and Google start to branch out into consumer credit. But there are certainly advantages for the banks.

Citibank will be the one that holds the deposits of Google’s customers with FDIC insurance. The bank can also increase its deposits through Google. Holding the customer’s money and then their loan is a key profit driver for banks. The bank will use this as an effort to “expand its ecosystem to leverage its national brand to earn more deposits,” according to Mike Mayo, senior analyst at Wells Fargo. But Mayo said Citi’s ability to cross-sell from those fields is still “uncertain.”

“The main takeaway from the banking industry is that big tech is more likely to partner with banks or otherwise face possible banking regulation,” Wells Fargo’s Mike Mayo said in a note to clients.

The technology-banking partnership is increasingly popular method for financial technology companies to manage the finances of customers without a bank charter. Google reportedly visited the office of the Comptroller of the Currency to explore obtaining a new special-purpose banking charter, but ultimately backed down, according to American Banker. The special charter took a heavy blow in November after a federal district court in New York decided that the Office of the Comptroller of the Currency, the regulatory body that issues charters, did not have the power to do so.

Technology will likely continue to build on this partnership model without the need to become a full-scale bank, according to Brian Peters, executive director of Financial Innovation Now, an alliance of companies like Amazon, Apple and Google that promotes technology. of electronic commerce. . Peters said despite calls for big tech disruption, these partnerships “will continue to work well.”

“This is something that could be a model for thousands of banks to expand their operations with the best technology in the world,” said Peters. “This will make the banks, especially the smaller ones, competitive with the JP Morgans of the world.”


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Joan Ferguson

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