Recent billion-dollar acquisition of PillPack by Amazon marks yet another significant move by e-commerce giant into disrupting pharmacy business. Already rumored healthcare venture by behemoths like JP Morgan, Berkshire Hathaway, and Amazon seems to be making significant progress over last couple of months. These series of events made me wonder what’s next for Amazon? Generally speaking, which industry technology might overhaul next?
Amazon, Apple, Google, Alibaba, et al. have already started venturing in financial services by offering plethora of services in consumer banking division. Amazon, for example, already finances merchants on its website, providing them with more than $3 billion since 2011. The e-commerce giant offers loans between $1,000 and $750,000 and then deducts that amount – plus interest – from the merchant’s account. According to a McKinsey report, banking revenues are likely to be affected by 40% by 2025 from services such as Google Wallet, Apple Pay, Amazon Wallet, etc.
Starting in 2013, Chinese juggernaut Alibaba Group Holding Ltd. took this to next level by selling a money-market fund to its gargantuan user base of about 500 million consumers. In a short span of four years, fueled by contributions from some 370 million account holders, the fund, known as Yu’e Bao—which means “leftover treasure”— has grown rapidly to manage 1.7 trillion yuan ($267.9 billion). What started as a fund built on “spare change” from online spending has gone on to become largest money-market fund in the world.
It wouldn’t be surprising, if Amazon or Google decided to follow the suit. According to a survey conducted by Bain & Co., nearly 60 percent of U.S. bank customers are willing to try a financial product from tech firms they already use. The interest was especially high for younger respondents. About 73 percent of people age 18 to 34 said they would try a tech firm’s credit card, deposit account, investment, or mortgage.
“If Google comes out tomorrow and asks if I want to invest? I probably would,” says Marcus Storr, who heads hedge fund investing at Germany-based Feri Family Trust. The search engine giant, has data on billions of its users and millions of dollars to splurge on the best coders from around the world, who could automate the search for lucrative trades.
According to Deloitte’s 2018 investment management industry outlook, with shrinking margins and fees in active fund management and unwieldy pressure from passive investment tools such as ETFs, tech companies could do to the investment industry what they’ve done to businesses from publishing to electronics, squeezing already-shrinking profit margins and driving out established players.
One argument against tech companies getting into hardcore finance is it will pull these companies under ambit of closely regulated business by feds. “If you’re a FAANG –Facebook, Apple, Amazon, Netflix, Google– type company and you decide you want to come into our space in a manner consistent with the way we operate, you will invite the Federal Reserve into every single thing you do. It’s a wide moat and a big decision to make.” argued Walt Bettinger – the chief executive officer at Charles Schwab Corp. “In our business the markets don’t just go up; markets go down too,” he said in the Bloomberg TV interview. “If you have an exceptionally successful business model and you’re one of the FAANGs, do you want to move into a business where 40 percent of the time you’re going to disappoint your clients?” continued Bettinger.
Bettinger has an interesting point, and for now, it might keep tech predators at bay. However, the more relevant question here would be for how long? Major money managers such as Fidelity and BlackRock are well aware of the potential threats and are also investing significantly in improving their technology offerings to provide best possible services to their clients. In 2015, Fidelity bought EMoney, which sells software to investment advisers that’s designed to make it easier to interact with their customers on budgeting for weddings, college, or retirement. BlackRock has made series of investments in technology startups such as Cachematrix, Scalable Capital, etc. It has also developed an operating system, Aladdin, which is claimed to be an end-to-end investment platform for fund managers.
“If I buy an asset, I know exactly what it’s going to do to the rest of the portfolio,” says Rick Rieder, CIO of BlackRock’s $1.7 trillion fixed-income business. When North Korea fired missiles over Japan this fall, he used Aladdin to check whether he was overexposed to the market and saw he would need to buy about $400 million of Treasuries to manage the risk. BlackRock’s love for technology is not new. It’s no accident that a piece of software may be the single most important differentiator for BlackRock. From the firm’s modest beginnings as a bond manager in 1988, CEO and cofounder Larry Fink put data analysis and risk technology at the forefront, instead of treating it as second fiddle to portfolio managers and traders.
“The roots of the organization were founded on the concept of risk management and technology,” says Fink. In an era of disruption, BlackRock is reporting record operating margins, and its stock is the best performer on Wall Street, returning on average 23% per year since its IPO in 1999.
Another interesting factor is use of Machine Learning and Artificial Intelligence in investment management. Assets in quant funds, many of which use AI, have surged by 86% to $940 billion since 2010. In 2016, when fundamental hedge funds suffered $83 billion in outflows, quants took in $13 billion, according to Hedge Fund Research. The trend continued in 2017.
In the end, I guess, we’re going to see a Darwinian battle (it is not the strongest of the species that survives, nor the most intelligent that survives; but the one that is most adaptable to change) between money managers and tech firms, and perhaps some surprising combinations on how they get to the market. It would be interesting to see how asset management and banking evolves as a business over next few decades.
Would you be comfortable investing in an Amazon fund? or purchase a Credit Card or take mortgage from Google? Leave your comments below.
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