Could you guess what sector a business belongs to from a short description of its activities?
Easy enough, you might think – but try the following example, from a Bloomberg article by Lionel Laurent:
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“[This business] lends $1 billion to small businesses in 12 months, holds $150 billion in corporate bonds, runs the world’s largest money-market fund, offers mobile payments and credit cards, and gives customers cash balances that can be topped up across thousands of homely bricks-and-mortar outlets.”
Surely, that could only be some kind of bank – except that it’s Google.
These days we hear a lot about ‘FinTech’ – i.e. when finance companies use hi-tech to deliver new services. However, we should also keep a watch on what I’m calling ‘TechFin’ i.e. financial services from tech companies:
“Google offers payments; Apple Inc. invests its cash in company securities; Amazon.com Inc. lends money and offers account balances in-store; Alibaba Group Holding Ltd. manages customer funds like an asset manager.”
Predictably, the ‘proper’ banks aren’t happy:
“Finance firms are lobbying heavily against an application by Square Inc., a fintech start-up run by Twitter co-founder Jack Dorsey, to be regulated as an industrial loan corporation, a kind of halfway house between bank and non-bank.”
As Laurent puts it, the established players don’t like the big tech companies “nibbling at the best bits of finance without actually taking on the burden of being a licensed bank.”
Banking may well have its burdens, but also has its privileges – not least the bail-outs that saved the sector after the credit crunch, not to mention less visible forms of corporate welfare like QE and state intervention to prop-up the property market.
If Facebook was facing bankrupcy would the US government bail it out? It seems unlikely – after all there’s no such thing as a ‘run’ on a social media network. If a tech company goes bust it doesn’t threaten the stability of the entire sector – or the economy as a whole. The loss of technical support may be a problem, but if significant numbers of people are relying on the company’s proprietary tech, it’ll probably be acquired by another company. As big as the big tech companies are, they’re not too big to fail.
However, that might change if their sidelines in financial services keep on growing and/or become part of the Jenga-stack that is the financial system.
Lionel Laurent indicates that were not at that point yet:
“One reason why shadow finance is so popular is the wave of rules brought in after the financial crisis designed to shrink the banking industry. If risk is being spread across non-systemic actors who are unlikely to need a government bailout if things go wrong, what’s the problem? Tech firms, along with funds and insurers offering direct lending, are filling a void left by banks – not destabilizing the system, reckons Norm Champ, a partner at law firm Kirkland & Ellis. They’re unlikely to go much further for now.”
The future could look very different though. FinTech has the potential to disrupt the sector – and have a lot more software engineers than the banks do. The likes of Google and Facebook are also sitting on enormous cash piles that they need to find a use for. Put the tech and the cash together (not to mention all the data they have on their customers) and you have the makings of a highly consequential challenge to the established financial institutions.
Perhaps instead of lobbying against new banks, the old banks could lobby against the tax avoidance that allows Silicon Valley to accumulate so much money in first place.
Of course, the bankers might think that too dangerous a thread to be pulling on.