Too Big To Fail?

Big banks and big tech are powerful forces in the global economy. And they’re on collision course. That’s according to Bloomberg, who recently wrote that “Big tech firms are behaving like big banks, all that remains is for regulators to treat them like it.”

The crossover between big tech and banking

There’s no denying that the functions performed by banks and tech companies have converged in recent years. The likes of Google, Apple, and Alibaba run large treasury departments with sophisticated ALM operations, and many of you who have made the trip to Braeburn Capital will know. These companies also offer mobile payments, cash balances and other financial services. And yet, nobody thinks of them as financial service firms. Nobody except the banks.

In recent years, senior figures at top-tier banks like Barclays and Deutsche Bank have publicly confronted the reality that technology is the key battleground for banks and will remain so for decades. Lloyd Blankfein is on record as stating that Goldman Sachs is “a technology company” and a recent presentation seemed more like a pitch for a tech startup than a world leading full-service bank. Tech firms might be unwilling to come out as banks, but banks are more than happy to come out as technology firms.

There is something cultural going on here. For whatever reason, the world’s largest tech firms are reticent about clarifying their business models. Just look at the recent Facebook scandal and the company’s traditional reluctance to shine a light on its status (and controversial operations) as an advertising business, positioning instead as a utopian “social utility”.

And yet, tech giants are more than social networks, search engines and e-commerce platforms. They are full-service lifestyle operating systems that pervade every corner of our lives. And yes, they are content to dabble in the best bits of finance whilst dodging the burden of becoming licensed banks. There’s a reason for this, and it begins with an “R”.

The elephant in the room

Regulation is important. But to succeed, it needs to be applied with an even hand. Right now, big tech enjoys a huge competitive advantage over big finance due to a nascent regulatory environment. By entering in to the financial space, technology firms will have to contend with a much more robust and rounded regulatory environment.

And so they should. The larger and more pervasive these firms get, the more risk they pose to our economic, social, political and emotional lives. Up until now, there has been much ignorance and apathy about these risks. That’s changing, now they have been proven to be real, systemic and seemingly avoidable through tighter controls and oversight.

Banks are good at regulation. They have grown up around it. They have well developed compliance functions. They have established relationships with regulators on a global level. Technology companies are new to this world. Adjusting will be painful, expensive and inhibitive for growth, and will no doubt affect stock market performance and shareholder value.

For this reason, tech founders are getting creative and crafty with how they approach regulations. For example, Square, a somewhat ubiquitous fintech run by Twitter co-founder Jack Dorsey, has applied to the FDIC to be regulated as an industrial loan corporation, a sort of shadow bank with much more freedom than a fully licenced outfit.

This approach might work in the odd case, but it’s not going to cut it for tech giants looking to muscle in on financial services. Whilst politicians might have been slow to recognise the political implications of social networks, financial regulators will be less easy to fool. Tech giants that pose risks to financial markets will be subjected to increased regulatory oversight in the years to come.  

Where does that leave Origin?

Origin is a tech company. Whilst we operate in the financial space, we are not interested in becoming a bank. Of course, many fintechs are. We’ve lost count of the number of new banks springing up, “disrupting” financial services to improve the customer experience and rehabilitating the image of the traditional retail bank. That’s a laudable aim, but the truth is, being a real bank comes with a raft of regulatory scrutiny, capital constraints, and many more things that we find unattractive from a business perspective. These parameters can come as a bit of a shock for people native to the tech world, where things move fast and regulation is friendly. Expect the attrition rate to be high.

Rather than trying to disrupt banking, it’s much more beneficial for us to work with banks. In this way, both parties can bring something unique and valuable to the table, accelerating each other’s growth. We’re in great company too. Cutting edge companies like Amazon are realising that collaboration is better than competition, hence its slated partnership with J.P. Morgan to offer bank accounts to its customers.

We learned this early on in our journey as a business, and it remains at the top of our minds when building our our platform and client relationships.