The Benefits Of The Google-Citigroup Connection
- The connection will provide Citigroup an opportunity to grow its retail deposit base - something it has been trying to do to catch up with competitors.
- It will provide Google with the opportunity to substantially expand its advertising dominance into other markets.
- The combination provides an example of how new opportunities are opening up both in "legacy" industries and in industries related to "big tech" - opportunities that will change the world.
I have already taken a position on the movement by Google (NASDAQ:GOOGL) to offer smart checking accounts in partnership with Citigroup, Inc. (NYSE:C) through Google Pay. I find this combination very interesting, presenting us with the opportunity to move banking towards the future.
Robert Armstrong, writing in the Financial Times, provides a little more insight into the transaction.
“Silicon Valley has already cracked payments. It is only a matter of time before it overturns more complex banking functions.”
But, Mr. Armstrong goes on.
“Fundamentally, a bank is a balance sheet, a data-processing system and a sales force.”
And he then adds...
Silicon Valley companies (Google) may be content to leave the balance sheet, the most heavily regulated bit, to the banks.”
“But, they are coming for the other parts.”
How do the two sides justify this combination?
From the banking side, Mr. Armstrong presents the following argument. Citi, he argues, seems to be willing to move in this direction because of its drive to increase its deposit base.
“It has a small physical footprint in the US - branches in just six big cities.”
“Citi’s $186 billion of US retail deposits are just over one-quarter of Bank of America’s (NYSE: BAC), for example.”
“Citi has been trying, with some success, to increase deposits nationwide...”
But this road to more retail deposits has been difficult and expensive.
The partnership, Mr. Armstrong argues, “may prove a cheaper way to gather deposits than the combination of channels Citi is trying now—even if Google, one way or another, takes a big cut.”
But this effort will not be an isolated one within the Citi environment.
“In Asia, partnerships with tech companies are already a key part of (Citi’s) retail operations. In mainland China, the bank says, 90 percent of its customers use WeChat to complete everyday banking and credit card transactions.”
Citigroup sees real possible growth of the bank’s balance sheet.
From Google’s side, there is worldwide customer base that Citi is building. Google is a data processing system, but it also is a marketing giant.
This is highlighted in the new book Agility, written by Leo Tilman and General Charles Jacoby, which I just reviewed this past week. Tilman and Jacoby argue in their book that in 2016, Google generated approximately $90 billion in revenues, of which close to 90 percent came from advertising.
The authors concluded that, “From this perspective, Alphabet is, most fundamentally, a digital advertising firm” - a major digital advertising firm. This conclusion was seconded by the Wall Street Journal when it published a major article leading off its second section titled, “How Google Edged Out Rivals and Built the World’s Dominant Ad Machine: A Visual Guide.”
The combination with Citi can certainly increase Google’s dominance in the world of advertising. But is gets into a problem area: the question of privacy.
Certainly, expanding Google’s reach into the banking area provides the company with a tremendous source of data - private data. Here, regulatory pressures are likely to be substantial because of the continually expanding reach of big tech into more and more sources. Google has made promises that it will not abuse its position. But this promise is being taken with “a grain of salt” by many analysts.
My bottom line, however, is about how the world is changing and transforming itself through advancements in information technology.
The management of Citi sees itself coming up short relative to its competitors in the area of deposit growth. It is seeking ways to eliminate this disequilibrium situation. The combination with Google, therefore, makes sense to them, especially with Citi’s experience in Asia.
The management of Google sees itself as expanding its dominance in the field of advertising. It does not want to deal with the problems of regulation faced by the banking industry. So, it sees a deal like this one as keeping its hands free of the banking regulation, while opening up major markets to it for advertising purposes.
This is the new world of the twenty-first century.
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