Google Pay, Plex and the future of banking

Big tech is building the new interface of banking, and bringing the banks along for the ride.

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On November 18 Google unveiled their major upgrade to Google Pay, which disclosed their ambitious intentions of becoming the operating system for personal finance. For a few years now the view has been that banks will become utilities and big tech will be the interface of banking. We have seen iterations with the wallet products Apple and Google Pay, as well as Apple’s new credit card with Goldman Sachs. Now Google has raised the stakes..

Where the rhetoric has been off the mark is the claim that traditional banks will be replaced by big tech. This is wrong, primarily because Google and Apple aren’t interested in becoming banks. They’re not prepared to tackle the infrastructure, the regulation and the responsibility of handling people's money. They’re happy to let Citi and Barclays and Goldman Sachs take care of that. Tech companies want to build experiences and serve customers, that’s where they thrive.


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So let’s break down the new Google Pay proposition, what it means for the market, what it means for banks and what it means for customers. 

In a 27 minute presentation published on Alphabet video platform YouTube (view here), Google presented Google Pay in three + one parts. The three core Google Pay features being Pay, Explore and Insights. The fourth is Plex, which allows users to provision a new bank account rather than bring your own account and funding source. Let’s start with Pay;

Pay

The rudimentary use case here is the ability to pay friends (P2P) and split group bills, like dinner checks or share house expenses. This is in direct competition to PayPal’s Venmo and Square’s Cash App. This raises all sorts of questions about competition and the market. The first is whether your friends need to be on Google Pay to participate? The reason Venmo is so popular is because everyone (in America) uses Venmo. Will people be willing to migrate across to Google Pay? What does critical mass look like before you kind of have to use Google Pay to avoid being the annoying person at dinner that can’t easily split a check?

Google Pay: Pay friends, or split bills with groups.

Something that is likely to get users onto Google Pay is the power of their merchant payment experiences. If you’re anything like me, you use Google Maps as a restaurant search tool, as it holds location and diner review data. Google is expanding on that in Pay to allow users to tap into a range of neat business experiences like finding, booking and paying for food at over 100,000 participating restaurants at launch. Click and collect has become a huge transaction method during the pandemic, and Google is launching with a massive catalogue from day one. Car owners can also find and pay for gas and parking easily within the app. 

Google Pay: Pay businesses. Order food directly from within the app.

This segues nicely into the second Google Pay feature: Explore.

Explore

“Come for the tools, stay for the network” - Chris Dixon, a12z

As users begin to make payments at their favourite retailers, Google will use that information to serve contextual offers. Much like the American Express rewards programme, users can explore targeted offers like 10% cash back when shopping at Warby Parker by pre-selecting the offers in the app. 

Google Pay: Access retail rewards and cash backs within Explore.

This is clever for a couple of reasons (and why the likes of Amex have been doing this for years), rather than making all of the offers automatically applied, the need for a user to pre-select offers informs Google of what offers are interesting, even if the user does not end up making a purchase. The Explore proposition more broadly also encourages users to pay with Google Pay. It’s all about payment volume.

And the third piece of the puzzle is Insights.

Insights

By using Plaid’s piping and large catalogue of bank connections, Google Pay users can connect all of their bank accounts and cards to access Google’s world leading data analytics horsepower. Like the countless personal finance apps that have been spun up on top of tools like Plaid, or UK Open Banking APIs, Google Pay will allow users to see spending charts, run personal cash flow forecasts and monitor upcoming bills. Which is table stakes of course.

Google Pay: Connect your accounts using Plaid, and gain Insights powered by Googles machine learning and powerful search capabilities.

What Google will bring however is the power of search to these insights. The ability to sync your photo album to access receipts, or run human structured search queries against your transactions, such as “How much did I spend on gas in March?” and Google will understand the merchants you shopped at and be able to farm and calculate the right transactions, without scrolling through an endless bank statement. If reliable, this is pretty powerful. And Google then benefits from using what it knows about all of your transaction history, not just your Google Pay history, to make better product suggestions in Pay.

Now I should be clear here. Google assures users that it will not use customer data in Pay to sell to third parties, or to cross sell other Google products (like adverts in Chrome browsing). However, users can turn on “personalisation” to receive more targeted suggestions from within Google Pay itself, such as Explore and its upcoming “banking” product, Plex.

Plex

Coming in 2021, Plex is the plus one piece I referenced at the top of this column. But it is by far the most interesting story here. 

Plex is in principle a bank account offered by Google itself. Unlike the current Google Pay experience where users connect their chosen funding source like their Wells Fargo account or a Chase credit card, Plex gives users the ability to provision a new account managed by Google. Like the Apple credit card there are banks at the bank end (Apple partners with Goldman Sachs), holding the customers money and taking care of the regulation, but to the customer it is Google you have the relationship with. 

Google is partnering with 11 banks at launch, with the flagship bank being Citi, who were rolled out in Google’s product launch. More banks will follow, giving Google a wide range of feature capabilities, market coverage and customer choice. Unlike Apple’s approach to its credit card which is a single bank provider. What is unclear is how customers will choose the banking provider, or will that be determined by their location and customer demographic?

So what does this all mean? There are a lot of threads to pull at here, with Google being the biggest and most ambitious banking as a service case study we have seen publicly to date. Here are six important takeaways in my mind;

  1. Venmo, Cash App and the operating system advantage

In the US 52 million people use Venmo, and now over 30 million are active on Square’s Cash App. These two have the incumbent’s hold on P2P payments, particularly around social experiences like meals, gifts and managing home expenses. However Google Pay has an access advantage, in that Google is both the application (Pay) and the operating system (Android). Google can make Pay the default financial tool for Android phone users, in which there are over 125 million in the United States. Google Pay is also available on iOS.

  1. Google Pay is following the playbooks of AliPay & WeChat Pay

When you watch the Google Pay presentation, you can’t help but think about Alibaba’s Alipay and Tencent’s WeChat Pay. Products that start with simple payments, and then horizontally pull in municipal and retail services. Google is starting in areas where their location products like Maps have established a network - food & beverage and gas stations. But soon expect to see Google Pay incorporate public transport ticketing, cinema and theatres, sporting events and so much more. Google is following Alibaba and Tencents’ playbook. 

  1. What about Apple? How will they respond?

The thing about Apple is they don’t need to be first to win. The iPhone wasn’t the first smartphone. The Watch wasn’t the first fitness smartwatch. And the iPad wasn’t the first tablet. But when they launch products, they’re so beautifully designed and well built that they win the majority. As analyst Benedict Evans says, Apple doesn’t ship experiments. They design and build in private, and they launch products that are ready to be used. 

Apple Pay is already a really slick product. And the credit card with Goldman Sachs was ahead of anything Google had launched previously. However, Plex appears to be leapfrogging anything Apple has built in the world of banking with the breadth of banking partners and services. I suspect behind the scenes Apple is thinking about how they can move into broader banking services, beyond a credit card.

One advantage Google has over Apple is their location data products. They hold so much merchant data through Maps, Search and Chrome that they have an ongoing advantage over Apple to build compelling features like Explore.

  1. The three roles in the model: Customer experience (Google), API/platform/connectivity (Stripe/Plaid) and banking/regulation (Citi, Goldman)

In simple terms, there are now three key role players to technology enabled banking. And banks will not try to be the whole stack anymore. Online banking and branches are being replaced by customer facing technology firms like Apple and Google, who build products people love using. 

Banks will fall back to their true expertise, balance sheet management and being regulated. Access to very cheap capital is power in banking, which is fundamentally still powered by issuing credit. And being regulated is expensive and hard. The banks have done it for years, and have all the best compliance people. They will now focus on these two things, and worry less about acquiring customers and building mobile phone apps.

The third is the layer in between. The platform, APIs and other connectivity tissue between the customer facing applications and the banks. For Google Pay, this is Plaid, who found a way to synthetically create Open Banking in the US before there was Open Banking. Meanwhile this week Stripe launched their own banking as a service platform in Treasury. Treasury by Stripe will allow countless business and consumer apps to offer banking to their own customers - whether that be merchants who sell on Shopify or restaurants who use Lightspeed’s POS tools. How they get paid is the most important financial relationship those businesses have, so they will be inclined to take banking products from Shopify or Lightspeed to access money faster. Stripe will power this, and will lean on banks like Citi and Goldman Sachs to hold and protect customer funds.

Banking is being unbundled, specialists are rising to the top and smart technology companies are connecting these players together.

  1. What does this mean for neobanks?

The promise of neobanks like Chime, or Monzo and Starling in the UK, was banking with better user experiences, like being mobile first and not relying on old branch customer models. Google is an engineering company that builds mobile software for half the world’s smartphones, and has developed some of the world’s best internet applications such as Search, Maps and Chrome. They will do a terrific job of building a mobile first banking application.

In addition, what has been less than stellar from many neobanks are their ability to issue credit to customers when they need it in 2020. Their lack of balance sheets meant when government backed loan schemes were established to battle the pandemic, traditional banks were lending and many neobanks served some or none of their customers with loans when they needed them. Plex by Google is partnering with banks like Citi, Apple with Goldman Sachs and Stripe’s banking as a service platform Treasury with Citi, Goldman and Barclays. They are giving customers confidence that their money is sitting with the world’s largest, most successful banks, but with the design and experience of big tech winners. Neobanks can’t compete with that.

  1. This will take time to deploy into international markets

Many of my readers will be based in markets like the UK and Australia, and wonder when products like Plex, the Apple credit card, and Stripe’s Treasury will be available outside of the United States. This is the trouble with banking - the regulations, licenses and infrastructure such as ACH payment networks are by design national, not international. 

I suspect new markets will come, but there is a lot of work under the hood to launch new financial products in new markets. You need compliance people who understand local laws, and you need banking partners in the market, which means contracts and integrations. That being said, it’s clearly by design that banks such as Citi and Goldman Sachs are being selected here over the likes of Wells Fargo, as the former have a serious presence in much of the western world. 

So while this story is about Google Pay, Plex and new financial products coming to market built by the best engineers on the planet, this feels more like an inflection point in how we think about banking and commerce at a macro level. And how business models are now truly changing in banking. The good news for us as big tech moves into another sector is history suggests the consumer comes out winning.