Big Tech firms don’t aspire to be banks, but they sure want a cut of their business.
Apple,
Alphabet,
and
Amazon.com
are rapidly encroaching on financial firms’ territory with digital wallets, payment apps, and even savings accounts. Banks and other financial firms are mounting a counterattack with their own apps—all fighting for a growing prize: billions of dollars in fees and other revenue as digital transactions grow from $9 trillion in 2023 to an estimated $16 trillion over the next five years, according to Juniper Research.
The battle for the digital wallet is also playing out in courts and regulatory fights in Washington. A group of credit unions is suing
Apple
over its digital wallet, alleging antitrust violations. Banks are lobbying for tech firms to be regulated like banks if they offer banklike services.
Tech giants aren’t pushing into payments and banking for the money per se. Apple isn’t going to move the needle on its $400 billion in annual sales with the 0.15% fee it charges banks to process credit-card transactions on Apple Pay. Even at $700 billion in transactions processed in 2022, according to estimates by investment bank MoffettNathanson, that would only amount to about $1 billion.
The bigger prize is monetizing consumer data and building “network effects”—keeping more customers in their ecosystems and selling more hardware or software. That speaks to the power of the tech industry to expand into lower-margin arenas to sell more of its highly profitable products, and it raises concerns that tech firms will use their financial heft and networks to undercut rivals like banks that have far more regulatory constraints and thinner profit margins.
Tech firms are expanding into payments and banking out of necessity, too. As hardware upgrades become incremental, services and apps take on more critical roles. You might not buy a new iPhone just because it’s slightly thinner or has a slightly better camera. But if your financial life is on the device, you’ll think hard about switching to an Android phone, and vice versa. Social media apps are also integrating more e-commerce, and whoever controls the payment rails gets a cut of revenue.
“What tech companies do really, really well is build networks. Once you have a network, it’s really hard not to pursue the delivery of financial services,” says Paul Hastings attorney Chris Daniel, whose clients include tech firms and banks.
Also vulnerable to being marginalized are payments companies
PayPal Holdings
and
Block.
PayPal stock is down 73% over the past three years as investors worry about it being muscled out of iPhones and online checkout, where Apple Pay is gaining traction. Similarly, Block is down 69% since early 2021; its Cash App is a rival to Venmo and PayPal, though it offers more merchant services where Apple and Google aren’t as large players.
“It’s hard to compete with tens of millions iPhones in the U.S. and hundreds of millions globally. They’re ubiquitous,” says
Mizuho
analyst Dan Dolev. The firms most vulnerable are ones that act as middlemen in transactions without adding much value, Dolev says. He recently downgraded his rating on PayPal to Neutral as it lost market share to Apple Pay.
PayPal and Block aren’t sitting still. PayPal recently outlined measures to rebuild revenue, including new “Smart Receipts,” which will let customers track purchases and use artificial intelligence to surmise what they’ll want to buy next. Block is making a big push into “buy now, pay later” with its acquisition of Afterpay, and it’s building out Bitcoin products like a hardware wallet to hold the cryptocurrency.
Techs firms don’t want to be full-fledged banks. To do that, they would need state or federal bank charters and would come under oversight by regulators like the Federal Reserve—something few in Silicon Valley want. Apple, for instance, partnered with
Goldman Sachs
for its credit-card and savings account program.
Bank trade groups are sounding alarms, however, as tech companies find ways to offer banking services without all the regulatory oversight. One new tactic, for instance, involves a loophole in an Eisenhower-era law that generally prohibits banks from engaging in other areas of commerce. The law doesn’t capture so-called industrial loan companies, or ILCs, which are state-chartered and can engage in banklike activities like consumer lending and deposit taking.
The Federal Deposit Insurance Corp. approved the first new ILCs in more than a decade in 2020, including an application by Block’s Square Financial Services. “It is only a matter of time before large technology firms like Google, Amazon,
Facebook,
Apple, or
Microsoft
apply for an ILC charter,” warned the Independent Community Bankers of America, or ICBA, in a white paper last year.
For some tech companies, the ultimate goal is a “superapp” that would bundle everything from savings to checking, lending, and payments—all rolled into an interface that includes social media and messaging. In China, apps like Alipay and
WeChat
bundle much of that together. Elon Musk bought Twitter partly to try to rebuild it as a superapp.
“Buying Twitter is an accelerant to creating X, the everything app,” tweeted Musk shortly before he completed the acquisition of the company, now called X, in 2022. In the past few months, X has received 18 state money-transmitter licenses that would be needed to offer payments on the app.
Some lawmakers want to put the brakes on the tech industry’s banking push. In December, senators including Banking Committee Chairman Sherrod Brown (D., Ohio) and John Kennedy (R., La.) introduced a bill that would close the industrial bank loophole, subjecting such entities to the same oversight and restrictions as regular banks. The bill was endorsed by trade groups like the Bank Policy Institute and ICBA, as well as consumer advocacy groups like the Center for Responsible Lending.
Apple is gradually being forced to let payment competitors in. The company is now opening up the tap-to-pay function on its iPhones to third parties in Europe in an attempt to settle a European Union investigation into whether it is violating competition rules. When most Europeans tap to pay for something, they’ll soon have an option to use another digital wallet.
Apple isn’t happy about this, warning about security risks and saying it would introduce new safety features on iPhones. “Even with these safeguards in place, many risks remain,” the company said in a statement.
Crackdowns on tech payment practices in the U.S. are gaining momentum. A federal judge in September said Apple would have to face a class action brought by credit unions in Iowa and Illinois alleging the company violated antitrust law with its tap-to-pay dominance, costing banks more than $1 billion in excess fees. Apple denies the claims.
Washington is also scrutinizing the tech industry’s push into financial services, with both Republicans and Democrats voicing concern. House Democrat Maxine Waters (Calif.) recently sent a letter to
Meta Platforms
demanding information about its ambitions in cryptocurrencies and digital payments. Apple is reportedly being probed for antitrust violations by the Biden Administration, which is looking into whether Apple Pay prevents competitors from offering similar functions on its devices. The Department of Justice declined to comment. Apple didn’t respond to a request for comment.
The Consumer Financial Protection Bureau is ramping up oversight, too. The CFPB this year could finalize a rule that would subject Apple, Amazon, and Google to regular supervisory checks on their payments practices, opening them up to fines and other penalties if problems are found. “We’ve learned that there’s huge conflicts of interest when you’re able to combine banking and commerce,” says CFPB Director Rohit Chopra.
Chopra sounds determined to thwart a U.S.-based superapp. One of his goals is to make sure Americans don’t wake up in 10 years to find one superapp dominating their digital lives. “The Chinese superapps really are a place where we continue to see directionally the U.S. market moving. So, that will continue to be a place where we look,” Chopra says.
Tech companies are pushing back: Amazon said in a comment letter to the CFPB that it’s first and foremost a retailer and that its payments applications didn’t pose banklike risks to consumers.
The tech industry has a mixed record in partnering with Wall Street and building out financial services. Goldman Sachs is seeking a buyer for its share of the credit-card partnership with the iPhone maker as it withdraws from most consumer services. Google in 2021 abandoned a plan to offer checking services partly through
Citigroup.
Meta in 2022 shut down its Novi digital wallet amid intense pressure from Congress and others.
Banks, meanwhile, are trying to prove they can play in the tech big leagues. Peer-to-peer payments app Zelle in the second quarter of last year handled $197 billion in transactions, 27% more than the year prior. Many large banks now offer “buy now, pay later” services. Later this year, a consortium of banks including
Bank of America
and
JPMorgan Chase
plan to launch their own digital wallet, called Paze, to compete with Apple Pay and Google Pay in the same way that Zelle competes with PayPal, Venmo, and Square’s Cash App.
Some experts see Big Tech taking on a new regulatory fight that it may not win, given the growing concern about the industry’s competitive practices. “Hypothetically, the big tech companies have a tremendous user base and could easily diversify into financial applications. The reality is companies that have tried this have run into a lot of problems because of concerns about the power of Big Tech,” says Harvard Business School associate professor Andy Wu.
Others think it’s only a matter of time before digital wallets evolve into the superapps that have already been embraced in China and parts of Africa.
“Technology, regardless of the efforts of the Biden administration and the federal banking agencies, will continue to march forward,” Daniel says. “It’s just a matter of how long it’s going to take to get there.”
Write to Joe Light at [email protected]
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