Google’s launching of Plex — another disruptor sets foot on the banking landscape
By: Nuruddin Walyani
Tags: Google, Fintech, Technology, Banking, Business

Google’s entry into the banking landscape could trigger a change to the role of banks. Both traditional banks and virtual neobanks need to understand the evolving consumer spending methods and remodel their businesses to be viable in the face of major change to the way that commerce takes place.

Last month Google revealed the 2021 launching of ‘Plex’, a consumer banking product designed to sit within Google Pay. The product is expected to have the full functionality of a checking account, savings account, peer-to-peer payments, and a host of budgeting and bill splitting features. Consumers are wowed. Technology peers are interested. Does Google want to be a bank? Why does Google want to go into banking? What difference is this going to make to the way we bank? And what does it mean for the banking industry?

Google’s business model

Of Alphabet’s 2019 revenue of $162bn (Google’s parent company), more than 80% of that revenue is derived from advertising. Through its products and platforms such as Android, Chrome, Gmail, Google Drive, Google Maps, Google Play, Search, and YouTube, google delivers relevant ads to users leading to direct engagement with advertisers. One driver could be that Google wants to use customer data to not only push the products of its underlying banking service providers, but use consumers spending data and behaviour (think data analytics and AI) to get even better at its core business of advertising. This would be hardly surprising, given that a recent Mastercard research has found that people in UK are now more likely to have a banking app than a social media app on their mobile phones. Real spending and transaction data would enable Google to further improve the targeting quality for advertisers.

Another driver for getting in on the banking business could be a wider platform play with the Internet of Things (IoT) ecosystem being developed through other Google technology such as Google Cloud and things like the Google Home hub. The payments and banking piece then becomes a valuable cog-wheel in a bigger machine that comes together to allow Google to have a full relevant ecosystem with direct access to consumer purchasing and payments technology.

And whether Google continues to target advertising as the method of monetizing its data, or does the ecosystem becomes a revenue and value generating business on its own, are business model questions that will be watched on keenly by many quarters.

What banks and fintechs need to learn

But there are numerous lessons for traditional and neobanks to learn from this, particularly in the current low interest rate environment, where traditional models of maturity transformation will leave the banks as utility service providers and erode the brand value and customer relationship links that they have.

The understanding of how they can create revenue and value is utmost important and this is likely to be by providing a combination of associated, peripheral and traditional banking services for the target segment. The business model can be such that revenue and value would be created through a play which is not directly the service that the consumer is using from the bank. And thereby the network ecosystem plays that the bank brings together has the utmost importance for the business model of the institution. Unless the interest rate environment changes, banks need to come up with business models that allow them to generate additional income from associated and peripheral streams, somewhat similar to the way that Google and other tech giants do — provide various internet and technology services while generating income from a completely different value stream (in the case of Google from advertising).

For neobanks that have mushroomed, not only is this a direct threat to their business models, (as a major tech giant will be offering the same experience and service which allowed the fintech startups to create a market in the first place), it also shows that the lower cost model is likely to end up a low-margin low-return business, even if the low cost base can be sustained! And without a distinct strategy to monitize its user base, the business will be even more of a low cost utility. Is there still a place for standalone neobanks? Acquiring millions of customers is an achievement, however that on its own will not allow these neobanks to succeed — they need to come up with a viable business model that allows for sustainable net income, and fast! The technology advantage that they have will not last for long as both big-tech and established incumbents focus on using technology to capture platform opportunities.

The consumer banking landscape is changing rapidly. The network of branches is being replaced by a network of services and connectivity. Banks, both traditional and virtual, need to understand what this means for their business model. With more and more things being connected to networks, what will be the future role of banks as we know them?

Whether Google succeeds with Plex or not, time will tell. But the fundamental questions on how banks remodel themselves is one which is still to play for.