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Curatia Analysis for Tue, Feb 19

Tech Struggles to Mount Assault on Vulnerable Financial Firms

The financial realm has long anticipated a siege by well-financed technology companies seeking high-margin plunder. The recent struggles of banks and asset managers — despite overall strength in the economy — suggest finance firms could be at their most vulnerable in a decade.

But tech firms have so far failed to penetrate finance’s inner keep, implying the threat may be less grave — or at least less urgent — than previously feared.

A new report by the Financial Stability Board (FSB), a global watchdog comprised of the G-20’s central banks and supervisors, warns that giant technology companies like Alibaba, Apple, Amazon, and Tencent “could quickly upend the banking industry.”

Those companies’ AI expertise, vast troves of data on consumer behavior, and huge customer bases make them an imminent threat to the wealth management and payments spaces in particular. Alibaba payments app Alipay and its global affiliates, for instance, have 1B users.

Regulations encouraging disruption in financial services have also narrowed banks’ competitive moat. In the US, the Office of the Comptroller of the Currency (OCC) has opened financial charter applications to fintech firms. EU laws meanwhile compel banks to share their consumer data with would-be fintech competitors.

Moreover, banks and asset managers appear more vulnerable than at perhaps any time since the financial crisis. Both have lost favor with investors in recent months as they grapple with eroding margins, choppy markets, and limited growth prospects.

Those difficulties have conspired to call into question whether financial firms can keep pace with Silicon Valley’s investments in ambitious R&D projects and pay top dollar for scarce AI talent.

Even so, the threat to financial services incumbents from tech challengers has so far been slower to materialize than many anticipated. While fintech firms have seen rapid expansion in the personal loan space, banks and credit unions have also continued to grow and still hold more personal loans ($62B) than fintechs ($46B).

US fintech firms have also been reluctant to apply for the OCC’s fintech charter, as state regulators have said they intend to file a legal challenge to the OCC’s authority on the matter.

More broadly, financial incumbents have used the threat from big tech as a lever in pleading for laxer financial rules and stricter regulation of tech companies — especially in Europe.

That dynamic raises the prospect that, ironically, it is financial firms themselves that have overplayed the threat from big tech in order to secure regulatory concessions.

Financial firms have increasingly focused on recruiting AI talent and pivoting to a more competitive tech footing.

They’ve also been more risk-averse than before the crisis, mindful of the reputational scarring they sustained. And capital requirements and other risk-reducing regulations may have helped entrench established players.

At the same time, tech companies have ceded their long-held “don’t-be-evil” aura of infallibility amid privacy concerns, charges of election meddling, and strategic setbacks. Those wake-up calls likely have industry titans pondering the reputational as well as financial risks of delving into financial services at the top of an economic cycle.

Greater social skepticism toward tech companies was on display over the weekend when Amazon nixed a plan to build a Long Island City headquarters with 15,000 employees after opposition mounted at the community and city/state government levels.

The development (or lack thereof) belied an ill-timed study, released earlier this month, that asserted New York City had overtaken San Francisco as the “world’s best tech city.”

Still, it amounts to good news for Wall Street firms, which gain a measure of breathing room in the long-distance sprint for top tech talent in New York.

That outcome mirrors a more general trend that has seen tech companies’ march into the financial domain bog down of late. Paradoxically, financial firms’ own struggles may also be helping their cause by diminishing the attractiveness of the space to big tech.