In October 2016, the Central Bank of Ireland provided Facebook (more precise Facebook Payments International Limited) with a license to offer e-money and payment services. This means Facebook can offer electronic money transfers to all inhabitants of the European Union from out of Ireland (Murgia & Arnold, 2017). Currently, Facebook already offers to send money via Facebook Messenger. For that service, you need to add a credit card or bank account to your Facebook account. With the license Facebook acquired, they do not need the traditional financial institutions anymore to offer this service (Hernæs, 2017).
The main question is whether Facebook is just looking for a role as a peer-to-peer payment provider, or wants to provide more complicated (and more profitable) banking services as well (Denecker et al., 2014; Reuters, 2017).
As the Payment Service Directive 2 (PSD2) requires banks to share their customer’s data (only with consent of the latter) with third parties (European Commission, 2015), this legislation offers companies like Facebook the opportunity to tap into the more lucrative segments of financial services.
Under PSD2, Facebook could opt to be a Payment Initiation Service Provider. This makes it possible for Facebook to directly access your bank account and provide payment services. The bank then only provides the back-end infrastructure (Murgia & Arnold, 2017).
Secondly, Facebook also has the opportunity to become an Account Information Service Provider, which enables them to provide an overview of all your bank accounts in one overview (Hernæs, 2017). This also allows them to offer extra services like reminders, statistics etc.
For traditional banks, especially this second opportunity means that they lose an opportunity to interact with their clients and to meanwhile provide them other (more profitable) services.
For most consumers the relationship with their bank consists above all of making and receiving payments. The payments services function as beachhead for a broader banking relationship and cross-selling products (Bollard et al., 2014; Denecker et al., 2014). Therefore, if Facebook enters this market segment, this eventually could lead to the end of banks as intermediaries. Their role is then diminished to serve the back-end infrastructure (Murgia & Arnold, 2017).
On the other hand, McKinsey discovered that the more customers use digital-banking channels, the more they actually use branches and call centers. This suggests that traditional banks can survive by strengthening the relationships with their clients (DeMasi, Patiath, & Nunez Maxwell, 2017).
Traditional banks have to integrate the digital and physical operations, to be able to keep selling their more profitable services. If they fail, they will end up with the low margin and high costs of basic banking services like cash handling (McRae, 2016).
Do you think traditional banks can survive? Some interesting areas to discuss maybe privacy, trust and the possibility that due to the amount of information Facebook already has, it could be better in assessing credit risk than traditional banks.
References:
Bollard, A., Doshi, N. & Nunez Maxwell, N. (2014). The future of US retail-banking distribution, New York: McKinsey.
DeMasi, D., Patiath, P. & Nunez Maxwell, M. (2017). Pathways to growth in North American retail banking, New York: McKinsey.
Denecker, O., Gulati, S. & Niederkorn, M. (2014). The digital battle that banks must win, McKinsey Quarterly, August 2014, p. 1-8.
European Commission (2015). Payment services (PSD 2) – Directive (EU) 2015/2366, Retrieved October 14, 2017 from: https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en
Hernæs, C.O. (2017). What Facebook’s European payment license could mean for banks, Retrieved October 14, 2017 from: https://techcrunch.com/2017/01/12/what-facebooks-european-payment-license-could-mean-for-banks/
McRae, H. (2016). Facebook payment system will change banking forever, but it comes with its own price tag – your privacy, Retrieved October 14, 2017 from: http://www.independent.co.uk/voices/facebook-payment-system-will-change-banking-forever-but-it-comes-with-its-own-price-tag-your-privacy-a6997636.html
Murgia, M. & Arnold, M. (2017). Bank of Tech poses growing threat to traditional institutions -Facebook, Amazon, Alipay and others cut out banks in providing payment services, Retrieved October 14, 2017 from: https://www.ft.com/content/1a862cd2-efd3-11e6-ba01-119a44939bb6?mhq5j=e5
Reuters (2017). Turns Out Many Consumers Are Interested in Banking With Google, Amazon, and Facebook, Retrieved October 14, 2017 from: http://fortune.com/2017/01/11/google-facebook-amazon-banking/
Hello,
Interesting to read that Facebook is licensed to offer payment services. Answering your questions, I would personally not give all my payment details to Facebook. I think there is still a privacy concern. I am also wondering how Facebook will develop itself as an alternative for banks. More and more “alternative banks” are coming up these days. Answering your question if traditional banks will survive, I believe not all of them will, but some do. Consider for example ABN AMRO. They are very innovative in their payment services. For example, they recently launched their application called “Grip”, where you can track all your spendings. It is very important for banks to keep track of all the developments and to invest in IT, only then they will survive.