Big Tech in the financial sector: the regulatory perspective
The financial industry’s current environment of continuous innovation requires a more sophisticated approach to balancing public policy objectives. Lucia Pacheco, Regulation and Internal Control Manager at BBVA, explains the impacts of the big tech entry into finance.
On the one hand, technological developments and the emergence of new players represent significant opportunities by way of greater competition, gains in efficiency and security, and greater access to more convenient financial services.
In recent months, however, the authorities who are responsible for ensuring financial stability have grown more concerned about a specific topic: the effects of big technology companies – the so-called Big Techs – making a more decisive move into the world of finance. Their offering of financial services is still limited in most regions, with the exception of China, but these companies view an incursion into finance as a way to strengthen their already successful digital ecosystems.
This isn’t the first wave of new players heralded in by the fintech phenomenon. So why are authorities like the Financial Stability Board (FSB), the Bank for International Settlements (BIS), and the European Central Bank concerned? The FSB put forward a response in February: the famed Big Tech have a competitive advantage that comes from their wide customer base, the enormous amount of data they can access, and their significant technological and financial capabilities. The FSB points out that this competitive advantage could create far-reaching changes in the structure and saturation of the financial sector, possibly causing serious impacts on the stability of the financial system.
These tech companies can take any number of approaches to involve themselves in the finance sector. First, as suppliers of critical inputs – cloud computing services and data analysis – services that financial institutions will have an incremental need for. Faced with this increasing dependency, authorities point to the fact that these services are concentrated in the hands of just a few suppliers, thus representing a potential source of systemic risk.
Authorities point to the fact that these services are concentrated in the hands of just a few suppliers, thus representing a potential source of systemic risk
In addition, big tech companies could become the face of payment, credit, insurance, and investment services for the customer, either working alone or partnering with third parties to deliver these services to the end customer. Although each participation model creates its own dynamics and risks, the brunt of the debate has focused on big tech activity in the payment space.
Widespread use of their transactional services and store of value – which would be facilitated in many regions with the introduction of open banking – could have an impact on banks’ financing models and on loan origination, while at the same time giving rise to the emergence of new infrastructure critically needed for payment system operations.
Given this possibility, the financial authorities should ask themselves if they have sufficient tools to be able to cope with risks such as those described, which currently fall outside the umbrella of the prudential framework. Cooperation between authorities – with different mandates and in different countries – will be key in the face of this inherently global phenomenon.