Earlier this week, the US tech giant Apple acquired Credit Kudos, a UK open banking startup that helps banks and lenders make better decisions (1).
According to three people closely associated with the deal, it was closed earlier this week. One source said that Apple valued the startup at about 150 million USD, a significant uplift in the total valuation.
Credit Kudos had last raised funds at the height of the coronavirus pandemic in April 2020, bagging about 6.5 million USD in a round led by AlbionVC (3). Other startup investors include Ascension Ventures’ Fair by Design fund, Plug and Play Ventures, Triple Point, Entrepreneur First, and several angel investors.
Credit Kudos offers insights and scores on loan applicants extracted from banking data, especially loan outcome and transaction data, sourced through the UK’s open banking framework. As per its website, the startup’s API offers lenders faster-decision making with increased acceptance rates and lesser risk.
The startup was launched in 2015 by founders Matt Schofield and Freddy Kelly. And with this deal, Credit Kudos have become the latest in a string of big European open banking acquisitions over the past year – the first by a tech giant.
There is not yet clarity on what Apple has planned for Credit Kudos. Apple’s move is seen as part of a trend as big tech companies threaten to replace traditional banks.
Apple primarily offers its financial products with its mobile wallet, Apple Pay, and a credit card that it started to roll out in August 2019 (4).
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Notably, the Credit Kudos acquisition is not Apple’s first in open banking and finance.
In the past, it paid 100 million USD for Mobeewave, a Canadian startup, to launch its much-anticipated Tap to Pay feature, which is likely to roll out later this year (5, 6).
The feature will be available on the iPhone XS and later models, available for payment platforms and app developments to integrate into their iOS apps as a payment option. Reportedly, Stripe will be the first payment platform to provide Tap to Pay on iPhone to customers via a new Shopify app. Apple said additional platforms and applications would follow later this year.
Once Tap to Pay launches on iPhones, merchants will be able to unlock contactless payment options via a supporting iOS app completed securely using NFC technology with no additional hardware. Apple further added that customers’ payment data would remain protected, and all transactions made via the feature are encrypted.
It is worth highlighting that Apple Pay is accepted by more than 90% of US retailers, and this new feature will allow more seamless checkout to people.
Google also had its own bank account product. However, it abandoned the idea to build a digital payments ecosystem to sell it to traditional banks as a part of its cloud services (7, 8).
“We are updating our approach to focus mainly on delivering digital enablement for banks and other financial services providers instead of us serving as the provider of these services,” said a Google spokesperson when the news was announced last year.
With this new approach, Google, owned by Alphabet, can help banks offer more secure methods for customers to make online purchases, including single-use tokens and virtual cards. While these methods and business strategies are all speculations, they could decrease online fraud by protecting users’ credit card numbers.
Besides big tech companies, card network operators Visa and Mastercard have also been driving consolidation in the industry. It has made the purchase of Credit Kudos only one of several European fintech to be acquired in the past nine months.
Last June, Visa paid about 2.5 billion USD for Tink, a Swedish open banking company (9). This acquisition was finalized earlier this month. Whereas, in September, Mastercard had announced the acquisition of a Danish open banking firm called Aiia (10).
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Over the past several years, investors and bank executives have shuddered whenever a tech giant hints about breaking into the financial services industry. After all, these big tech companies have access to millions of users, their data, and track record for transforming sectors like media and ads.
While we were looking for reasons behind Google abandoning its banking plan, we found reports suggesting that Google didn’t want to antagonize its current and prospective customers for its various businesses (11).
Google has been funneling more resources into its cloud business for the past few years, which is still behind Microsoft and Amazon in terms of market share. However, it is making steady gains under the leadership of Thomas Kurian and CEO Sundar Pichai, who has repeatedly called financial services a target for customers they are looking to attract.
“Banks are worried about disintermediation. I believe it is likely that Google got signals that banks were not on board with the tech giant’s plans. Hence, they decided to bet that there was more to gain in selling to banks instead of selling to customers,” said Peter Wannemacher, an analyst at Forrester Research who advises banks on digital efforts (12).
At the same time, the reality has been proven less disruptive. In 2018, Amazon was reportedly exploring bank accounts, a project that is yet to materialize (13). Uber had also announced its fintech ambitions in 2020 (14). At the same time, Facebook rebranded its entire crypto project amid several setbacks (15).
Nonetheless, we are seeing some big banks embracing big tech companies. Some examples include Goldman Sach’s credit card collaboration with Apple and JP Morgan also partnered with Amazon recently. And it has led us to believe banks slowest to adapt could end up being replaced.
It is especially true for a large traditional financial institute with outdated technology like the US Bank is at risk of being outrun by tech giants like Apple, Google, or even Paypal (16).
It is also worth mentioning that almost 82% of Americans use digital payments (17). Meaning, Big tech companies are well-positioned to gain from the reduced need for traditional lenders.
Besides, both Google Pay and Apple Pay are compliant with the United Kingdom’s new “strong customer authentication” regulations, which further reduces the need for traditional banks as mediators (18).
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Big Techs Taking on Big Banks
Fintechs have always posed a threat to traditional banking and the financial sector. However, there has long been a more ominous threat from big tech. And we can expect to see this threat finally materializing as Apple, Amazon, and other tech giants start utilizing their overwhelming global resources, reach, and consumer data to diminish the bank’s monopoly power.
Two main things are playing into big techs’ hands:
- The move towards a cashless society
- User experience with real-time data to analyze insights and customize recommendations to individuals
Traditional banks are making significant progress in these areas with a renewed focus on AI integration and ML to enhance customer experience. But, Vibig tech companies have a significant head start when it comes to innovation, not to mention their huge swathes of data that allow them to respond quickly to consumer trends at scale (19).
In addition, these big tech companies also often onboard the brightest and best talent, which may leave several traditional banks struggling to recruit for the roles they need to catch up. The whole scenario is unlikely to get better in 2022 as competition for top talent remains fierce.
They are always looking years forward, and their skillset – and can continue to attract – is crucial to this. Without significant internal cultural changes, banks may soon find themselves further behind that they will be unable to recover.
If that isn’t enough to make traditional banks nervous, the UK’s new “strong customer authentication” (SCA) legislation, which went into effect this year, will favor internet companies over traditional banks.
They will allow big tech firms to rethink how customers pay for items when combined with the further advancement of open banking. Apple Pay and Google Pay are both SCA-compliant, making them simple to implement for businesses that accept online payments. Similar policies are emerging in other parts of the world, and big tech stands to benefit the most.
For starters, they can generate and use large-scale, real-time data about their users (20). Apple, for example, will be able to use Kudos data to help people develop credit and give more cards to deserving borrowers. It may also use iPhones as PoS devices to offer small business loans to retailers, just like a bank.
What may begin as a payment conflict will become more existential for banks.
Big tech businesses already have a worldwide consumer base and do not require the infrastructure or capital of banks, removing the banks’ competitive advantage over smaller fintechs.
The necessity for banks’ centralized pots will diminish as consumers prefer the immediacy and convenience of tech-enabled smart payments for goods, services, and in-person cash transfers. Amazon and Google, for example, have ample financial reserves to match them.
Traditional banking will be waiting closely for tech companies to make their first movement in 2022. The banks will have to choose between ignoring the threat and collaborating with it. Because restrictions are unlikely to prevent big tech from entering finance before 2025 (21), collaborations with big tech may be the best way for big banks to profit from the financial sector’s digitalization.