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What if GAFA replaced Traditional Banks?

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Beyond knowing whether GAFA could eventually replace traditional banks, this study questions the relationship between GAFA and the banking system. What innovations have they brought to the banking sector? Are they the future of banking?

First, it is crucial to define the terms of the topic. The acronym GAFA stands for Google Amazon Facebook and Apple, their importance and their economic weights are recalled. It is necessary to remind that in 2014, the GAFA’s GDP was equivalent to the one of Denmark, with obviously much fewer human resources. After talking about GAFA’s characteristics, the study continues with the definition of traditional banks: they realize three functions including transformation of maturity and risks as well as money creation through the granting of credits to loan applicants. Traditional banks also have an apparent character trait: important debt financing activities which bring a very important leverage effect.

Then, what is the relationship between GAFA and the financial word? It is important to notice that for a few years, GAFA try to impose themselves into that area and each of them is proposing new innovations: whether it is Apple with Apple Pay, Facebook with its cryptocurrency : the LIBRA , Amazon and its credit card Prime Rewards or Google with its peer to peer payment solution : Google Pay. Their products are all very innovative and they might be a threat for traditional banks. GAFA have an important head start on some banks not only regarding the innovation but also regarding market power and economic power… The fact that all those technologies are available for traditional banks customers directly on their smartphones make the banks fear the worst from GAFA.

If GAFA are a threat to traditional banks, are they really capable of replacing them? On the paper, these corporations have strong assets to assert like an efficient and proven Big Data management. But banks have a privileged relationship with their customers. They manage in a better way sensitive data and try as well to innovate in order not to be dumped (e.g. LyfPay a payment platform controlled by BNP and Crédit Mutuel very used by young customers).Also, they experience a restructuration of the branches network in “phygital” combining physical interactions with an advisor and the use of innovative digital tools. Moreover, traditional banks have another advantage that GAFA will not have access for now after recent scandals: the consumer’s trust regarding personal data, corruption…

To conclude, GAFA are still friendly and cooperative. It is necessary to know that all innovations previously cited (Apple Card, Prime Rewards…) have been developed in cooperation with one or several banks. Until now, GAFA still lean on traditional banks for all their banking solutions. Beyond this cooperation, some digital banks also emerge to try to counter the GAFA, other traditional banks also invest massively in Big Data. The GAFA’s arrival has brought an innovation wave to the banking system, the real winner for now is the customer.

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