Are You Ready For a Google Checking Account?

Shares of Google NASDAQ: GOOGL stock continues to rise. This time the stock market is applauding Google’s push into the financial services space. The tech giant recently announced it will begin offering checking accounts starting in 2020.

The convergence of finance and technology (known as fintech) has been around for a while. In fact, the lines between what customers can do at a bank and via alternative sources like PayPal NASDAQ: PYPL is blurring. Google is taking an even larger step into the fintech space. The initiative, called Cache, will expand Google’s fintech offerings that already include Google Pay and Google Wallet.

There will be no “Bank of Google”

Let’s be clear about one thing. Google is not interested in becoming a bank. Instead, Google is partnering with existing banks and credit unions to launch Cache. The financial institutions will bear the responsibility for the financial and regulatory approvals.

Google is not the first big tech company to enter the financial services space. Apple NASDAQ: AAPL recently launched its Apple Card. Amazon NASDAQ: AMZN is also working with financial institutions to explore offering checking accounts. And Facebook has made waves with its intention to launch a digital currency, Libra.

However, unlike Apple that does not prominently announce their affiliation with Goldman Sachs NYSE: GS on its Apple Card, Google plans on making the involvement of their partner institutions prominent in the launch of Cache. Google’s initial partners will be Citigroup NYSE: C and Stanford Federal Credit Union.

"Our approach is going to be to partner deeply with banks and the financial system," Caesar Sengupta, general manager and vice-president of payments at Google, told the Wall Street Journal. "It may be the slightly longer path, but it's more sustainable."

For their part, financial institutions see their association with Google as a way to attract younger, tech-savvy consumers who are actively seeking ways to handle more of their lives with online tools. The thinking is once they have these customers, the financial institutions will be able to leverage Google’s ability to work with large data sets to create and offer value-added products.

However, Google is being clear that they don’t use their existing Google Pay data for advertising and they don’t share it with advertisers. But will consumers believe that?

It’s a matter of trust

Alphabet (the parent company of Google) is one of the “big tech” companies that find itself in the crosshairs of government regulators. This includes indications that the company may be subject to a Department of Justice (DOJ) antitrust probe.

However, as much as consumers express concerns about their personal data being compromised, many consumers – particularly millennials - have little or no misgivings about eschewing a traditional bank in favor of Google.

In fact, in a recent McKinsey & Co. survey, 58 percent of respondents said they would trust financial products from Google. Only Amazon scored higher.

Already, PayPal and Apple are already making it easy for consumers to get an array of services that would normally be left to a traditional bank. PayPal, for example, has its Personal Capital program in which small business owners can receive small business loans completely based on their sales activity. There’s no credit check and repayment is automatic every time the company has an invoice repaid.

Services like Google Pay and Apple Pay are making it even easier for consumers to walk away from their personal banking relationships.

But another reason is a little more black and white. Millennials have come of age in the post-financial crisis era. In some cases, they have witnessed the struggles their parents have had with traditional banks. And they see companies, like Google and Apple, as being better capitalized (and therefore less risky) than traditional banks.

When you come right down to it, consumers are saying they are more likely to trust Google then a bank.

What does this mean for Google stock?

In the short term, I wouldn’t make the possibility of Google offering a checking account your primary reason to buy or sell Google stock. A checking account is fairly low hanging fruit, and consumers don’t frequently change their checking account very frequently. Google will certainly capture some early adopters, but it remains to be seen how much traction this effort will get.

For right now, investing in Google should still be primarily about its core business, which remains strong.

In Alphabet’s (the parent company of Google) fourth-quarter earnings report, the company announced revenue of $40.5 billion which was in line with analysts’ expectations. But the company’s earnings per share came in slightly lower than expected. Part of this earnings miss was a sharp decline in paid clicks, the area where Google makes its most money. On a year-over-year basis, that area showed an 18% growth as opposed to 62% in 2018. The news wasn’t all bad. Google’s “cost-per-click” (i.e. the revenue it receives from each click) only dropped 2% as opposed to the 28% drop year-over-year.

However, since the earnings report, Alphabet shares have been rising and the stock is now up over 23% for the year. This means the stock continues to closely track with the S&P 500 Index.