January 01,2020

WHAT IF GAFA REPLACED

TRADITIONAL BANKS?

Yovina Mathuvirin

Translation: Wency-Wenceslas MOUNDOUNGA

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

Preface :
Nowadays we hear a lot about the transformation of the banking sector. Among the terms
that are used, two often make the headlines of medias, GAFA and Traditional Banks. Who
are they and why have they become so famous these days? How is traditional banking
affected by GAFA? This is what this article will deal with. First, these two keywords will be
defined to understand after how it is an innovation in the banking system. Finally, we will
respond to this issue: how GAFA cause a threat to traditional banks and whether they may
replace them. A conclusion will be reached at the end.

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

Who are the GAFA?
The hegemony of GAFA, acronym of Google, Apple, Facebook and Amazon are the 4 digital
giants that cause concern in Europe as well as in the United States. According to a recent
study entitled Gafanomics carried out by the FaberNovel cabinet in 2014, the GAFA generate
the equivalent of the GDP of Denmark, the 35th largest economy in the world. The big web
giants have a GDP equivalent to 316 billion turnover and together employ 252 000 people
while Denmark has a GDP of 330 billion dollars for a 2.7 million population. We can see that
the GAFA have an economic model that allows them to produce more with less human
resources (GAFA=Denmark GDP with 10 times fewer workers ).By adding Microsoft, they
occupy the 4th place in the world economy in 2018 (after having occupied the 5th place in
2017) with a cumulative market capitalization of nearly 4250 billion dollars.

Source: Farnault-investissement.fr

One of the main growth factors of these American players is obviously their economic model
and their strategy which allow them to stand out from the rest. Research and development
as well as human capita, are the keys factors in their real success. For example, Facebook
spends 7.8 billion of its budgets on R&D, Amazon 22.6 billion and in total, GAFAM have a
budget of nearly 70 billion dollars. On industrial scale, we can see that there is a disparity
in the services they offer (See below).

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

 Source: Fabernovel

We can see that the Facebook and Google income are mainly made up of advertising, the
turnover of Amazon is mainly coming from the distribution and Apple’s from its smartphones
and associated products. However, we notice a rather striking similarity between them that
is offering financial services. With their diversification, they turned upside down the
financial world which had long been controlled only by traditional banks. We will now define
what a traditional bank is before going over how GAFA represent a threat to these banks.

What are the characteristics of a traditional bank

This goes back to 3000 years BC. from Antiquity to the Middle Ages, through Ancient Rome,
many practices have developed among managers and in commerce to give birth to well-
regulated banking institutions. They perform 3 functions including the transformation of
maturity, risk and the creation of money due the granting of credit to loan applicants. One
of the most apparent characteristics is a fairly significant leverage due to the fact that they
are financed by debt. We clarify the term traditional bank to distinguish new typologies of
banks on the market such as online banks, or Neobanks. This recent version of bank allows
transaction account management directly from smartphone.
This new bank formats have made traditional banks more expensive because they have
physical branches. With the arrival of the financial services offered by the GAFA, the task of
“old” banks is becoming increasingly complex and even the disappearance of some.

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

GAFA: rather destructive than creative innovation
There has been a rise of web giants in the financial world. In January 2017, Amazon entered
the payment market with the launch of a Visa Prime Rewards Visa Signature Credit card
issued by JP Morgan Chase, which is reserved only for Amazon Prime subscribers. With this
high-end card , it offers advantages to its best customers by offering them a cashback : 5%
of the amount of all their purchases made on the web site, 2% of their expenses at the
restaurants, gas stations and pharmacies and 1% of all other purchases as well as payment
facilities. In addition, the e-marketer has entered into discussions with banking giants such
as JPMorgan Chase, Capital One among others to get into retail banking. Jeff Bezo’s firm
wants to offer transaction accounts to young audience and to people who do not have a bank
account. In other words, to those who cannot buy on its website. In this approach, he will
be able to widen its market target even if according to Consumer Intelligence Research,
Amazon Prime has 65 million users in the United States, which represents almost 20% of the
American population. Apple meanwhile made a partnership with Goldman Sachs in early 2019
to launch credit card called Apple card. Moreover, in 2014, the Apple Icon had already
entered the payment market. As the Apple card is not a stand –alone payment method, it
only allows iPhone users to pay for their purchases by working with their smartphone. As for
Amazon, Apple allows its users to obtain cashback on their purchases up to 1% to 3% of the
amount paid. In addition, Apple offers to make its card the default payment method and will
charge future iCloud, iTunes or App store payment from its users directly on the same card.
In addition to this credit card, the firm has also developed budget management features
that will allow Apple card holders to track their spending regularly.
Facebook has also taken the plunge in the financial sector with its project to create digital
currency, Libra which would be used on their main website but also on these Messenger and
WhatsApp. According to the project’s white paper, Libra’s mission is to develop a simple
global currency and financial infrastructure serving billion of people. Libra is considered as
“stable coin” i.e. a cryptocurrency indexed to a basket of stable fiat currencies such as
dollar, euro, pound sterling among others. In other words, it should not be subject to price
volatility.
In addition to its ability to be stable, this cryptocurrency is very promising as an exchange
intermediary, which is done instantly without going through the banking network. However,
this project has been attacked by financial regulators around the world mainly due to the
uncertainty of transaction management that hangs over a project of this importance – a
project that affects 2 billion users. Last November, Mark Zuckerberg’s company nonetheless
launched its payment service Facebook Pay (Which is different from the Libra project). The
objective is to allow users to make purchases directly on Facebook or Instagram, but also to

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

be able to participate in fundraising or make a money transfer via Messenger. Finally, Google
also joined them by positioning itself on banking services with the launch of a transaction
account offer in partnership with Citigroup, according to the Wall Street Journal. The
“Cache” project is expected to be set up next year. The account management will be
operated by Citigroup and Stanford Federal Credit Union. It is good to know that its parent
company Alphabet already offered a Google Pay electronic wallet and in July 2018, Google
and Google Pay Send merger made it possible to offer a peer-to-peer payment service which
is now done directly in Google Pay market. So far, the only beneficiaries of these services
are users of the American market.

Why GAFA cause a threat to banks?

The diagram below summarizes the financial services offered by GAFA.

Source: Bankobserver- Wavestone

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

We can see that there is something to worry about for banks because they are not only
powerful in terms of market power, but also the services they offer are very innovative.
With their new open ecosystem, they have put traditional bank to the test. GAFA, by
embedding their latest technologies in the smartphones of traditional bank customers, make
banks fear losing exclusive customers access. As a result, they have raised customer
experience standards with digital solutions that are faster and cheaper, something that
banks are struggling to do. According to World Retail Banking study, customer experience
across all banking channels is positive for only half of customers. Although banking
establishments have intensified their investments in this direction, the answer is still not up
to par. The level of satisfaction reaches 51,7% online ,51,1% in agencies and 46,9% on mobile.
The study also points out that more than 7 out of 10 consumers would not hesitate to turn
to the offers made by GAFA especially young people. In addition, according to a study by
one of the French regulators, the ACPR, the business models of traditional banks based on
the mastery of the value chain from customers relationship to product design and risk
management are put to test in the digital age. In addition, market share gains based on "data
sharing and transactions" make the traditional banking business more complex. It is mainly
in the area of payment that competition is more intense.
Unlike their American counterparts, European banks do not necessarily welcome a GAFA
alliance. Indeed, French banks are wary of GAFA. BPCE group and Société Générale are the
only ones that have made partnerships with Apple’s payment system or the offer of money
transfer by Facebook’s email. Also launched in 2014, Apple Pay has taken time to develop
on the French market and it is not sure to see the arrival of the Apple card in France, as
cashback is a practice that is still not widespread in Europe.

Is it possible for GAFA to replace traditional banks?

At first glance, it can be noted that Google, Amazon, Facebook and Apple have taken a step
ahead on traditional banks with their innovative payment service tools and the idea of a
potential creation of a cryptocurrency. All of these actors have at least two things in
common: massive investments in technology and good management of consumer big data.
Traditional banking players, for this part do not necessarily have the same assets, but they
can highlight their loyal customer relationships as well as a good command of their sensitive
data. In a diversification strategy, GAFA pushed their multi-service platforms dedicated to
customers to the limit, which warned traditional banks. However, these same financial
institutions are already starting to work on home payment solutions in a logic of community
and platform. For example, LyfPay, widely used among the youngest, is a mobile application

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

controlled by BNP Paris bas and Credit Mutuel and is accepted in many stores. Cashback
offers which are very common in the United States are entering the French market. Société
Générale formalized in 2018 its launch of an “in store” and “in-app” cashback offer. The
bank has partnered with 20 retailers, which total 1,500 point of sales in France, where its
customers could benefit from "repayments of an average of 5% of their expenses amount",
says Société Générale, which estimates the gain for regular customers at "about 100 euros
per year". Indeed, it is a good way for traditional banks to federate and retain their
customers. In this same approach Stepahne Dehaies, Banking and Fintech partner at KPMG,
underlines that the banks have understood that it was no longer the product, but the
customer that should be at the center of new banking models. These innovations have also
led to an overhaul of the network named phygital. This combines the interaction of an
advisor for the subscription of high-value banking products and a digital part with digital
tools that will aim to give a better image to the bank. This new concept will be a plus for
banks and from which GAFA will not be able to benefit. Another advantage is that traditional
banks will be able to strike the right balance between respecting privacy of their customers
and enhancing services.
On the other hand, the users of the web giants have a hard time trusting them because of
the recent scandals on personal data. In addition, GAFA maybe subject to a slowdown in the
financial sector as they are suspected of anti-competition practices. For example, Google
has been sued several times for abuse of a dominant position especially for the Android
system. In order to counter the GAFA market monopoly, banks tend to associate with
Fintech.

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

Conclusion :
GAFA have so far indicated that their intentions are friendly and cooperative. In fact, most
of these offers are based on traditional banking networks such as Google which partners with
Citigroup and a small cooperative bank of Silicone Valey, Apple with Goldman Sachs and
Amazon with JP Morgan Chase. In addition, Caesar Sengupta Vice president of Google pointed
out “our approach will be to form deep links with banks and the financial system. It is the
best way to do it over time”. From the perspective of traditional banks, within a few years,
they will be able to take advantage of their investment in big data by also having a
phenomenal stock of customer data. This will allow them to anticipate their customers’
needs and adopt a more personalized offer and thereby maintain a relationship worthy of
quality with their customers. As they have already faced competition from FinTechs (N26,
Revolut among others) the fight against GAFA does not seem to be impossible for them.
Another important point is that in order to continue in this financial environment, GAFA
must work hard with regulators which is not won in advance especially in Europe. We have
already noticed this with the Libra project which quickly faded. In view of all this, it looks
more like a boon than a threat. The contribution of GAFA to the financial sector has sparked
a wave of innovation on the bankers' side and consumers are the winners of both
stakeholders. Also, the development of online payment, credit card and cryptocurrency
platforms by these tech giants could be a response to the non-banking of populations from
developing and underdeveloped countries. "Banking is necessary, banks are not!"

WHAT IF GAFA REPLACED TRADITIONAL BANKS ?

Sources:
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devenir-3eme- economie-mondiale-facebook-amazon-google-microsoft/
http://www.revue-banque.fr/revue-banque/numero-821

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menace-ou-une- aubaine-pour-les-banques/
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WHAT IF GAFA REPLACED TRADITIONAL BANKS ?