Google Bigfoots Fintech

Does the entry of a massive global player necessarily destroy the competition?

Hi from James Ledbetter, former editor-in-chief of Inc. magazine and author/editor of six books. Thanks for reading FIN, the best weekly newsletter about all things fintech. Please forward this to anyone you think would appreciate it!

Number of the Week: $1.3 billion (explanation below)

Google Bigfoots Fintech

That jolting quake the fintech world felt on Wednesday came from Google stomping its massive foot onto the online banking/payments ground. Google Pay announced that it is transforming from a tap-to-pay service into a full-fledged financial services app. The new service will be called Plex, and plans to be fully functional in 2021.

The range of financial services that Plex promises is quite far-reaching: peer-to-peer payments; automatic payments to restaurants and parking meters; free-to-open savings and checking accounts, with Google-branded ATM cards; expenses management; and more. Google will partner with established banks—including Citi—to offer banking services, and of course there will also be all kinds of offers and cashback rewards and discounts that will power the whole system. And it’s not as if Plex is starting from scratch; the company claims that 150 million customers in 30 countries already use Google Pay. Even healthy fintech companies like Venmo have to be worried about Plex.

When you look outside the U.S., it’s hardly unimaginable that a multi-service giant like Google might come to dominate the world of digital banking and payments. Approximately 80% of mobile phone owners in China use their phones to make a point-of-sale purchase at least once a year. A relatively small number of companies control the Chinese mobile payment space, and they all evolved from companies (such as Alibaba and Tencent) that first grew huge in a business that wasn’t financial services.

What sets Google apart from most comparable businesses is, of course, the massive reach it already has into our digital lives. Consider how much Google knows through search and gmail; adding financial transactions creates a data colossus without precedent. In this sense, it’s downright brazen for Google to expand its financial offerings a mere month after the Justice Department accused the company of operating illegal monopolies in the search and advertising markets. For what it’s worth, the company says “Google Pay will never sell your data to third parties or share your transaction history with the rest of Google for targeting ads,” but clearly Google will gather and use financial data to make money.

Will Plex bring further scrutiny into Google’s business practices? Zachary Karabell astutely observed this week that what makes companies like Google and Facebook a different kind of monopoly than, say, Standard Oil is that their dominance stems not from sheer size, but rather “the companies’ use, and abuse, of data to erect empires.” This is important because the traditional American approach to antitrust has focused on harm to consumers, usually in the form of high prices. That framework doesn’t work with the tech giants, who tend to give away their products for free and can plausibly argue that their actions lower prices. For this reason, regulatory action on Plex might well come from the European Union before it comes from Justice.

It’s also entirely possible that Google Plex won’t catch on. The market is so fragmented that a big-player entry doesn’t always amount to dominance (which might be a good thing). There was a lot of excitement when Apple Pay launched in 2014, and it has grown nicely, currently accounting for about 5% of global card transactions. But it’s still approximately neck-and-neck with PayPal, and nowhere near as large as the big Chinese players.

The platinum lining for fintech firms who’ve just found themselves bigfooted: maybe Alphabet/Google will get bored with fintech in a few years, in which case your perseverance will pay off. Or maybe they won’t—in which case you’ve found a deep-pocketed acquirer.

Falling Off the Beam

Sometimes the line between innovation and fraud is disconcertingly thin, as could be seen this week when the Federal Trade Commission sued the San Francisco-based fintech startup Beam Financial. Beam had made a name for itself by promising consumers higher-than-market interest rates if they would help spread the word to their friends and social media followers. Although Beam itself is not a bank, the deposited money would be kept in safe, regulated institutions and available for withdrawal in a normal period of time. Beam, launched in 2018, called itself the “first mobile high-interest bank account designed for the 99%.”

For months, Beam customers have been posting damning reviews and accusations in the App Store, using words like “scam” and “ripoff.” Several complained that they were unable to get access to their money, and that Beam wouldn’t even get back to them with an explanation. In May, the FTC issued a Civil Investigative Demand for documents from Beam; aside from trying to get that demand removed, Beam appears to have never responded. This fall, CNBC began running some very aggressive stories featuring angry Beam customers, and Beam started blaming some of its financial partners. It also appears Beam was avoiding paying taxes, and the whole episode is producing stacks of litigation. (I reached out to Beam for comment, but received only an automated reply.)

It doesn’t seem as if Beam’s underlying business was fraudulent; it involves using a “sweep account” to put money into FDIC-insured banks and collecting interest on it (although exactly how Beam was able to get interest rates high enough to offer its customers as much as 7% on their deposits has never been explained, and indeed the FTC charges that Beam customers only received a fraction of what they were promised). Beam will likely go bust, and its departure probably won’t affect the universe of online banking much beyond its own customer base. But this kind of fraud is bound to proliferate elsewhere, and the Beam saga is one more piece of evidence that financial services are in need of a regulatory overhaul.

FINvestments

🦈Number of the Week: Andreessen Horowitz this week announced that it has closed “Fund VII,” devoting $1.3 billion to seed- and early-stage investments in “consumer, enterprise, and financial services technologies.” Call it the Future Fintech Unicorn Fund.

🦈The S-1 that Affirm filed this week has been pretty well picked over, with Felix Salmon and others noting the remarkably strong relationship Affirm has built with Peloton. One fact that jumped out at me was just how large the “buy now pay later” market is in the EMEA region—projected to be nearly 10% of the e-commerce market by 2023.

🦈This week saw the debut of Daylight, which bills itself as the the “first LGBTQ+ digital banking platform in the United States.” Banking and money present interesting challenges for this community, as this Fast Company story explains.