Banks face threat from tech giants

Google, Apple are real rivals, consultant says

TORONTO • Upstart financial technology companies may be nipping at the heels of the world’s big banks, but new research from global consultant McKinsey & Co. suggests established “platform” players such as Google and Amazon are emerging as the real threat to the incumbent financial firms’ healthy margins.

“Seventy-three per cent of U.S. millennials say they would be more excited about a new offering in financial services from Google, Amazon, Paypal or Square than from their bank — and one in three believe they will not need a bank at all,” declares McKinsey’s latest annual global banking review, released Wednesday.

Asheet Mehta, co-leader of the global banking practice at McKinsey and one of the lead authors of the report, says the edge the platform companies have is that they are creating entire digital ecosystems with a range of “intuitive and pleasing” goods and services that are available through a single access gateway.

“In quite a few markets, platform companies have already begun attacking banking revenues,” Mehta said.

“And there is no reason to think this trend will not spread to other markets.”

Lest anyone think Canada is exempt, the McKinsey report quotes Dave McKay, the chief executive of the country’s largest bank, Royal Bank of Canada, acknowledging the situation facing the banks.

McKay, who has long accepted the challenge from the platform players, says the banks’ best defence — at least in the short term — is the trust clients have in them to provide secure services and protect sensitive financial data.

“Trust and security are key assets,” the report quotes McKay as saying. “They buy us time.”

The CEO of Royal Bank has been warning of a “collision course” with the likes of Google Inc. and Cupertino, Calif.-based Apple Inc. since early 2015, just months after assuming the top job. At conference for investors in New York in March of that year, McKay said banks and large tech and e-commerce companies could work together to offer some financial services — like the Apple Pay mobile wallet — but he warned that such collaboration could result in new players getting in the middle of the important relationship between banks and their customers.

Fast-forward a little more than a year, and all of Canada’s major banks had begun offering ApplePay to their clients. Meanwhile, partnerships are being forged with smaller fintech firms as those relationships have become less adversarial.

“The greatest threat to banks from digital competitors no longer comes from fintechs, which have often struggled to scale and have entered into partnerships with banks,” says McKinsey’s Mehta.

McKay said that in 2015 RBC was looking for alternatives where the bank could remain at the top of the ecosystem, a strategy reinforced by this week’s McKinsey report.