The release of the Libra Association whitepaper earlier this year, backed by Facebook, has fuelled increased discussion about how TechFin and BigTech companies could change the financial landscape.
Incumbent banks and financial services providers have been innovating and repositioning themselves for many years to deal with competition from FinTech companies.
TechFin companies present a different and potentially much more disruptive challenge to the status quo, and incumbents are aware of this.
Comparing FinTech, TechFin and BigTech
Both FinTech and TechFin are concerned with the application of technology to finance. But there is an important difference in emphasis.
FinTech companies’ core business is financial services. There are an estimated 1,600 FinTech companies in the UK generating £6.6bn in revenue per year.
These companies are innovating in areas like payments and money transfers, financial product comparisons, insurance, lending and borrowing, financial planning, and in a range of additional B2B areas like analytics, digital identity and cybersecurity solutions.
TechFin companies, in contrast, are technology companies that are leveraging their existing technologies, data, brands, customer bases or other assets to broaden their product offerings into financial services. They have core businesses in areas like technology, online retail or social media but have now realised the potential to build on their vast data resources, digital platforms, and experience in designing user-friendly services to disrupt the financial industry.
Google, Amazon, Facebook and Apple together with Alibaba, Baidu and Tencent in China are often cited examples of TechFin companies. Companies like Google, Amazon, Facebook and Apple are also referred to as BigTech companies because of their size and consequential market influence.
How the FinTech landscape is changing
Much FinTech debate up until this point has been focussed on competition between incumbent banks and financial service providers and smaller FinTechs and challenger brands.
The usual narrative is that smaller FinTechs can innovate quickly unencumbered by legacy systems, but face challenges around achieving scale, funding, and market penetration, as well as regulatory challenges.
The entrance of companies such as Facebook into financial services in a meaningful way is potentially game-changing.
If FinTech companies are innovative, TechFin companies have the potential to be truly disruptive – that is, to create things or find solutions to problems we couldn’t previously envisage and by doing so create new markets.
Up until now, the financial services offerings of the large tech companies have focused on low-hanging fruit. The Apple Card, for example, promised consumers new features and an excellent digital experience, but was an evolutionary innovation building on services like Apple Pay.
However, Facebook’s Libra Association announcement – a long term attempt to create a global digital currency through a collaboration between some of the world’s biggest tech companies - suggests that TechFin companies are moving into longer-term disruptive projects.
Libra would certainly be a disruptive rather than evolutionary innovation.
30 groups and charities signed an open letter to say that the US regulatory system is simply not currently prepared to answer the national sovereignty, corporate power, consumer protection, competition policy, monetary policy, and privacy issues raised by Libra. Libra could be banned in India under current laws.
The TechFins’ potential for disruptive innovation is a significant threat to incumbent finance companies and banks.
Facebook and other TechFins have enormous scale, brand recognition and existing relationships with billions of users. They have track records in digital innovation and come with well-established digital ecosystems and platforms that span multiple sectors and already hold significant portions of consumers’ online identities. They have the breadth and scale to offer consumers a truly seamless global digital experience.
Whereas growing FinTechs may struggle to get regulators to hear their concerns, TechFins have the lobbying capacity to influence the conversation and change the regulatory landscape. While they may lack the decades of regulatory experience of the incumbent banks, the signs are that the TechFins are hiring experienced bank lobbyists to make up for this.
Established banks and finance companies have been innovating by incubating, purchasing or partnering with FinTech companies. The decision by heavyweights like Visa and Mastercard to be founding members of the Libra Association and Barclays’ recent agreement with Alipay suggests the bigger strategic conversation for incumbents is whether to collaborate or compete with the TechFins.