The chaos related to data privacy concerns and the use of customer data has had a major, negative impact on the valuation of the so-called FAANG (Facebook, Amazon, Apple, Netflix, Google) companies, reducing their market capitalization by a range of five to 15 percent in just a few weeks and raising questions about the sustainability of the business models of these companies going forward. Chinese Internet giants such as Alibaba, Tencent and Baidu have also been affected.
As the investing community sorts through the news and assesses the prospects for FAANG and other tech companies, European banks have an opportunity to reposition themselves as trustworthy, technologically sophisticated companies with opportunities for growth after a lengthy period of reorganization and, in some cases, downsizing.
In the bad news for FAANG, there are some potential positives for banks, including:
- The likelihood of new regulations on FAANG and other tech companies. New regulations could impose additional costs and put obstacles in the way of non-traditional competitors—particularly those that obtain and handle large quantities of customer data—that are seeking an easy path into the banking business. The required recent investments in GDPR at the European level thus potentially provides banks with a new competitive advantage.
- Even greater emphasis on customer privacy and the protection of customer data. This is something banks have, in general, handled reasonably well—both in terms of data security and client privacy. With new safeguards and more concentration on cybersecurity, banks can position themselves as a more reliable alternative to online providers of financial services.
- Better access to talent. Top technology people (as well as top operations and finance people) may look at alternatives to working for tech giants facing headline, reputational and regulatory risks.
While looking at these positive elements, we also need to look closely at the fintech ecosystem for signs of stress in the wake of FAANG developments. So far, however, fintechs’ ability to raise venture capital and attract early stage investors seems undiminished.
Similarly, the gap between the valuation of banks vs. digital players has hardly diminished over the past weeks, with FAANG price-to-book valuations still at 10 times those for banks. The differential reflects contrasting expectations of the group’s growth potential, with future value reflecting more than 50 percent of the enterprise value of FAANG throughout 2017, vs. only 16 percent of the enterprise value for leading banks, and about -7 percent for the non-leading banks.
Despite the efforts of some banks to be perceived (and valued) as technology players, they have not received tech-type market valuations. The current crisis of trust associated with some FAANGs presents banks with a unique opportunity to leverage the trust and security built into the DNA of many banks.