Google is getting into banking to take back the business it lost to Amazon

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Sundar Pichai, chief executive officer at Google LLC, speaks during the Google Cloud Next ’19 event in San Francisco, California, U.S., on Tuesday, April 9, 2019.

Michael Short | Bloomberg | Getty Images

Google is getting into banking — but not with the same motivations as Wall Street.

The tech giant is launching customer checking accounts next year in partnership with Citigroup and Stanford University, a source familiar with the plan told CNBC.

Google’s key motivation is customer data, according to analysts. By seeing what users spend money on, the Mountain View, California-based company may be looking to get a leg up in the online search battle with Amazon.

“Google is likely entering into these partnerships to increase its insights into consumer purchase behavior (and consumer finances more broadly),” Wells Fargo’s internet analyst Brian Fitzgerald said in a note to clients Wednesday. Fitzgerald said the move was to maintain and expand influence over consumer demand — a “key strategic priority” for the company.

Amazon has 54% of U.S. product searches online, compared to Google’s 46% market share, according to recent research from Jumpshot. CB Insights senior intelligence analyst Arieh Levi pointed to Google’s plan plan to brand the checking accounts under the names of partnering banks — not its own.

“That’s a marked difference from Apple and others, and it shows that Google is primarily focused on data to feed its core ad business, and less so on acting as a full-fledged bank,” he said.

The checking accounts, first reported by the Wall Street Journal, will be accessible through Google Pay. Thousands of banks in the U.S. already offer virtual card transactions through Google Pay. By making the Google ecosystem and payments “more engaging” customers are more likely to keep using the platform, according to Bain partner Gerard du Toit, who leads the firm’s banking and payments sector of Bain’s Financial Services practice in North America.

“For Google, the deposit account will help with stickiness and additional access to data — customer data is what they make its money on,” said du Toit. “The motivation for these tech firms is not that they expect to make huge amounts of money on payments, but because of what it brings in terms of consumer benefit and stickiness.”

The playbook for bringing in customers will likely include higher interest rates and some sort of cash-back incentive to draw people from their existing bank, he said. Eventually, de Toit expects Google to expand into credit cards, too.

“I would expect as all of these big tech firms to push into financial services, it will be payment agnostic of whether it’s a credit card or checking account,” du Toit said. “I would be surprised if they don’t over time offer some alternative. It’s a Darwinian experiment for which are successful.”

Google has not given details on interest rates or incentives but a spokesperson said they “look forward to sharing more details in the coming months.” For now, the company is “exploring how we can partner with banks and credit unions in the US to offer smart checking accounts through Google Pay” and helping their customers “benefit from useful insights and budgeting tools, while keeping their money in an FDIC or NCUA-insured account,” the spokesperson told CNBC.

Less ‘controversial’ than credit cards

Fellow tech titan Apple is also getting deeper into banking with a Goldman Sachs backed credit card. This week, high-profile users complained that their spouses were discriminated against, highlighting potential headaches in the credit underwriting decisions. The bank said it’s looking into ways that family members can share a single card. Ryan Gilbert, general partner at Propel Ventures said checking accounts tend to be “less controversial” than credit cards since everyone is eligible — there’s no credit check needed.

By starting with checking account instead of a credit card, Google is ensuring that it doesn’t have to “disappoint” customers by not approving their creditworthiness, according to Bain’s du Toit.

There is a risk of disintermediation as Wall Street partners with big tech. For the banking industry, it appears to be a beat them or join them decision as these Apple, Amazon and Google begin to wade into consumer finance. But there are certainly upsides for the banks.

Citibank will be the one holding Google customer deposits with FDIC insurance. The bank can also grow its deposits through Google. Holding customer’s money then lending it out is a key profit driver for the banks. The bank will use this as an effort to “expand its ecosystem to leverage its national brand to gain more deposits,” according to Wells Fargo senior analyst Mike Mayo. But Mayo said the ability of Citi to cross-sell from these deposits is still “uncertain.”

“The main bank industry takeaway is that big tech will more likely partner with banks or otherwise face potential bank regulation,” Wells Fargo’s Mike Mayo said in a note to clients.

The tech-banking partnership is increasingly popular method for fintech companies do handle customer finances without a bank charter. Google had reportedly visited the Office of the Comptroller of the Currency to explore getting a new special-purpose bank charter, but eventually backed off, according to American Banker. The special charter was dealt a blow in November after a federal district court in New York decided that the Office of the Comptroller of the Currency, the regulator issuing the charters, didn’t have the authority to do so.

Tech will likely continue to lean on this partnership model without the need to become a full-scale bank, according to Brian Peters, executive director of Financial Innovation Now, an alliance of companies including Amazon, Apple and Google that advocates for e-commerce technologies. Peters said despite calls for big tech to be broken up, these partnerships will “continue to work well.”

“It’s something that could be a model for thousands of banks to scale their operations with the best technology in the world,” Peters said. “It’s going to make banks, particularly smaller banks, competitive with the J.P. Morgans of the world.”

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