United States, November 18, 2020 – Google parent Alphabet Inc. (Aa2 stable) announced that it will launch Plex Accounts next year, a digital bank account offered within its Google Pay app in partnership with 11 US banks and credit unions. Google’s expansion into the distribution of consumer banking services is credit negative for US banks because it will increase competition for customer relationships, and in particular, competition for deposits, US banks’ primary funding source.
The launch of Google Pay Plex Accounts is an example of big tech’s expansion into retail financial services. It capitalizes on the rising popularity of digital wallets, an example of the widening application of digital innovations in financial services that we expect will continue to drive disruption across banking. Digital innovation and a flourishing financial technology sector present a threat to US banks.
Alphabet’s expansion into retail financial services distribution is consistent with our central scenario that large nonfinancial institutions intent on enhancing customer engagement will partner with incumbent banks to distribute financial services. Alphabet’s ability to partner with US banks and credit unions demonstrates the increasingly low barriers to entry for firms with large existing customer bases to distribute consumer financial services including deposit offerings. Digital innovation and changing customer behavior have lowered such barriers that historically included building out an expensive branch network.
US banks’ balance sheets are built on a foundation of low-cost, sticky deposits. Google Pay Plex Accounts will have no fees for monthly service, low balance, overdraft or in-network ATM use, and market its user-friendly interface and capabilities. Many US banks have similarly introduced online-only deposit products with low to no fees and/or high interest rates to capture additional deposits and customer relationships. Over time, increasing competition could raise deposit costs, pressure deposit fees and increase the need for banks to invest in emerging technology to attract or maintain customers. Failure to respond risks driving shifts in market share to those banks who best meet customer expectations.
The 11 US banks and credit unions partnering with Alphabet to offer Plex Accounts, including Citibank, N.A. (Aa3/Aa3 stable, baa11), would benefit from an inflow of consumer deposits and the potential to deepen new customer relationships. Citibank, N.A. and the other partnering banks will also have an early-adopter advantage in evolving their digital strategies to meet new customer needs. With the accelerating use of mobile payments and rising popularity of single-click digital wallets, incumbent banks need a strategy to stay in the customer-facing part of the payments business.
Alphabet will offer Plex Accounts within its own digital ecosystem, Google Pay, which provides a level playing field for partnering banks. However, the lack of friction within such a digital environment could ultimately increase competition among financial institutions, on and off the platform. Alphabet’s expansion into the distribution of financial services would align with big tech strategies to increase the scope and appeal of their digital platforms through enhanced customer engagement and a further strengthening of their consumer value proposition.
The launch also provides a blueprint for other firms with large existing customer bases keen to capture an increasing share of consumer activity and build customer loyalty. Increased user engagement enables these firms to capture valuable data and boost revenue. In our view, partnerships in which banks cede control of a large share of customer relationships pose the greatest risk to incumbent financial institutions. Such developments increase the risk of our alternate scenario, where big tech firms control a larger share of distribution and displace incumbents that fail to execute timely, effective digital strategies.
Credit Outlook: 23 November 2020. Pg. 16
Moodys
Atlantic Investors Service 