Moody’s expects consumer technology giants to be major disruptors in financial services

If Google, Apple and Facebook control client relationships, they can take control of financial product distribution.

Moody’s Investors Service expects large technology firms like Google, Facebook and Apple to continue expanding their ability to distribute and offer financial products and services, emerging as significant competitors to traditional consumer-facing financial institutions.

The greatest risk to incumbent financial firms is retail-facing technology giants taking control of customer relationships and distribution of financial products, according to a report Moody’s released on Tuesday. Technology-focused companies can enter finance with products core to their businesses, such as payments, that can create and store value — just as Square did with its Cash App.

As account balances grow, technology firms can easily start offering low-cost index funds, investment advice, insurance and financial planning, the report said.

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This would turn existing financial institutions into primarily product manufacturers and lead to consolidation in the industry, especially among mid-market and small, nonspecialized firms.

What remains to be seen is whether financial institutions can successfully evolve before this happens. The report named JP Morgan Chase as an example of a firm investing heavily in an ecosystem of products that parallel the tech industry’s strategy. But the report said financial firms have not proven they can successfully produce such an ecosystem.

“Although we expect agile, innovative incumbents, namely financial institutions with greater resources and comprehensive, executable digital strategies, to do well in the new digital age, the ever-increasing speed of change enabled by new technology is clearly a threat,” the Moody’s report said.

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The problem facing many firms is that digitization requires a high initial investment and ongoing maintenance costs. But retaining clients and acquiring new customers is increasingly dependent on digital user experiences, and technology firms have a significant advantage in creating convenient and easy-to-use onboarding experiences.

Moody’s also presented an even more nightmarish scenario for financial institutions, in which technology companies also manufacture financial products to better control the user experience and retain profits. This would require a change in regulatory processes and tech business practices, but it’s possible.