Behind Google's Plan to Enter Consumer Banking

Alphabet Inc. (GOOGL), one of the world's largest companies with a market value of $890 billion, is mounting an ambitious strategy to become a major force in consumer banking. The company's Google division is working on a plan, codenamed Cache, to offer consumer checking accounts in 2020, according to a detailed exclusive report in The Wall Street Journal summarized below.

The service would be offered through the Google Pay app, but the accounts will reside with a growing number of U.S. banks. Current partners include Citigroup Inc. (C) and the small Stanford Federal Credit Union affiliated with Stanford University, and accounts will be labeled prominently as being with these institutions. Google already is a large and growing player in digital payments, with its digital wallet called Google Pay projected to have 100 million users worldwide by 2020, versus 39 million in 2018, per Juniper Research. Google Pay would be the key portal through which customers open and manage their checking accounts.

"Our approach is going to be to partner deeply with banks and the financial system," said Caesar Sengupta, general manager of payments solutions at Google, in an interview. "It may be the slightly longer path, but it's more sustainable," he added. He indicated that Google would partner with more banks in the future.

Significance For Investors

While Citigroup is among the largest national banks in terms of assets and deposits, it has a much smaller branch network than its top rivals. An alliance with Google is a play to increase its reach in consumer banking significantly without added brick-and-mortar expense. "We have to be where our customers are," says Anand Selva, head of U.S. consumer banking at Citigroup.

As of June 30, 2019, Wells Fargo & Co. (WFC) led with 5,578 branches, JPMorgan Chase & Co. (JPM) was second with 5,054, and Bank of America Corp. (BAC) was third with 4,323, per USBankLocations.com. Citigroup was way down in 16th place, with just 711 branches.

According to a recent survey by consulting firm McKinsey & Co., 58% of respondents indicated that they would trust financial products and services offered by Google. By comparison, the rates of positive responses for other big tech firms were approximately 64% for Amazon.com Inc. (AMZN), 56% for Apple Inc. (AAPL), and 31% for Facebook Inc. (FB).

Google Pay has a number of rivals. Apple Pay, for one, had about 140 million users in 2018, and is projected to reach 225 million in 2020, per Juniper. Samsung Pay, from the South Korean electronics giant, is expected to reach 100 million users in 2020.

Facebook has just begun rolling out its own payment service, Facebook Pay. Initially available to users of Facebook and Messenger, it eventually also will be available to users of Instagram and WhatsApp, per the company. Payments will be processed by partners such as PayPal and Stripe, and Facebook promises users advanced security and anti-fraud provisions, as well as privacy protections.

Looking Ahead

The amount of political and regulatory scrutiny already being focused on big tech players such as Google may be especially intense regarding its foray into banking. There are bound to be serious concerns about the privacy of users' personal financial data, and established competitors in banking who feel threatened are bound to raise them.

Parent firm Alphabet already is the target of federal probes into alleged anticompetitive practices, and has been levied a huge fine by European regulators. Google also must be careful to avoid mistakes made by other tech firms. Apple, for example, advertised a credit card offered in partnership with Goldman Sachs Group Inc. (GS) as "designed by Apple, not a bank," a boast that alienated Goldman.