An intro into GAFA, BAT and how they play in FS
Tech titans have made big plays in FS. However, the approaches of eastern and western tech behemoths have differed. Here we break down how that has taken shape and where it might head into the future...
Recently, news broke that the triad of Baidu, Ant Financial and Tencent – commonly referred to as BAT – are retreating from Silicon Valley. Publicly disclosed investments dipped from $4.7 billion in 2015 to only $560 million last year.
With this drop in mind, I thought it’d be worthwhile to chart the historical playbooks of both the BAT companies and the Google-Amazon-Facebook-Apple (GAFA) cohort and tease out the differences between them. Turns out there’s a backstory behind the geopolitical game that’s being played out across the world’s biggest markets.
From an industry perspective, our banking battlefield illustrates the key advantages tech companies have – intelligent services and lots of customers. On a slightly more granular level, there’s much to be understood from adopting a regional perspective.
And it’s these insights that will help inform possible models for the future.
If you’re new to the topic, let’s distill it down.
Broadly speaking, the GAFA and BAT companies have pursued radically different approaches to strategic development. Born in the US, Facebook, Apple and Amazon have pursued global expansion after capturing domestic share of their core and then adjacent business lines. Meanwhile, the BAT cohort remains mostly regional. Alibaba earns 11 percent of its revenue from outside China; that figure dips to five percent for Tencent and one percent for Baidu.
The nascent governance framework in China is one reason for this. Chinese authorities famously took two decades to draft anti-monopoly laws before implementing them in 2008. Since then, the actual enforcement of these laws has been questionable.
The GAFAs, on the other hand, are beginning to face greater scrutiny in their country of origin but have generally benefited from unrestrictive enterprise. Recently (and famously) some have been the subject of antitrust hearings from both the US Justice Department and the House Judiciary Committee.
Many people ask me when the GAFAs will take over finance. My response is usually that they already have
The types of FS verticals that both cohorts have typically targeted have been historically different. Many people ask me when the GAFAs will take over finance. My response is usually that they already have. Google, Amazon and Microsoft now receive a large portion of revenues from their cloud service provisions from FS companies. On the flip side, this deep coverage could result in a client conflict if they were to release consumer-facing products.
Perhaps as one consequence, we have seen Apple teaming up with Goldman Sachs for the Apple Card or Amazon setting up e-wallets through JPMorgan Chase. Western tech companies have turned to their clients – established financial institutions – both to keep ‘em sweet and to swerve the regulatory scrutiny that comes with full-service banking.
The BATs’ atypical growth has been slightly different. Graduating to lending, wealth management, insurance and credit scoring, the BATs have used payments as the ultimate customer acquisition engine, plumbing the foundation of the ‘super app’.
What followed was a previously unimaginable thirst for investments. Ant Financial has already teased a $1 billion investment fund to back start-ups across Asia and India, adding to the approximately 160 start-ups they have invested in over the last five years.
On a wider scale, Tencent has stakes in over 700 companies, while Alibaba (Ant Financial’s parent company) has around 350. Compare that to Google (~200), Apple (~106) and Amazon (100+) and you get a sense of how the BATs’ investment activities differ from those of the GAFAs.
Thus far, the GAFA companies have concerned themselves with cloud-based, institutional products. Instead of developing banking infrastructure, they’ve opted to build out macro infrastructure and sales functions.
BATs, on the other hand, have focused on investments and financial technology, all while developing their portfolios and establishing a cross-border presence. As competition increases within China, companies have even begun to expand beyond its borders – see Ant Financial’s attempted Moneygram acquisition last year or Tencent’s investment in TrueLayer for recent examples. They are now forecast to tackle the tech services market, while lowering their percentage of revenues attributed to financial services.
Both cohorts have established presences in payments and credit. The goal in each case is to build fully integrated financial and commercial platforms without getting mired in regulation. As mentioned above, this has been a primary reason for partnerships among GAFA companies.
So who might own the future?
The answer requires a bit more nuance: neither GAFAs nor BATs will completely own the banking sector, in the same way no one bank owns the retail sector today.
Despite all the buzz about tech titans’ prospective domination of financial services, it’s unlikely that a consortium of tech titans will take over the industry, let alone a group of regional rivals.
The truth is, financial services is a big space. There’s enough room for GAFAs, BATs, banks and fintechs alike to carve out their own niches.
Besides, the GAFAs and the BATs seemingly don’t want to own banking by becoming regulated financial services entities. If anything, their behaviour shows they want a sizable stake in fintech instead. As mentioned above, Ant and Tencent alike have undertaken massive M&A strategies to seize control of the industry through reach and scale.
They may not own all of banking, but tech titans’ impact in financial services will still be pronounced for years to come
Even that goal will be difficult, though. Elements of trust and personalisation are built locally, which puts such globally-minded companies at a disadvantage. It remains to be seen whether GAFAs or BATs can shop one set of fintech products worldwide, breaking free of local nuances, expanding services to a wider customer base (nods to the BAT’s), without running afoul of regulators.
The reactions to this rush of acquisitions have been mixed. Labelled as a reason for raising the barriers to entry for new companies, especially in Asia, the BATs’ M&A spree has also been accused of stifling innovation. On the other hand, it has also been lauded for increasing the inflow of capital into new fintechs and for creating positive socio-economic domino effects.
Even with these obstacles in place, the GAFAs and BATs will continue to strive for fintech dominance. They may not own all of banking, but tech titans’ impact in financial services will still be pronounced for years to come.