Big Techs Raise Important Issues Globally Beyond Traditional Financial Risks

Big technology companies (big techs), especially in Asia-Pacific and North America, have been moving into a wide range of financial services globally at a very rapid pace. Big techs such as Alibaba, Amazon, Apple, Baidu, Facebook, Google and Tencent have an incredible amount of data about our everyday purchases, daily habits, and interactions with others. These companies are already participants in financial services through asset management, insurance, and lending.  Big tech firms first offered, payments services primarily to help buyers and sellers on e-commerce platforms overcome lack of trust. Since then, however, they have moved to providing a wide array of financial services.

It is imperative that legislators and regulators globally work together to take stock of existing forums and regulations that may already exist to supervise big techs' financial service activities. Authorities also need to conduct a gap analysis to see what might be missing that needs to be created to protect the financial system from potential data privacy, competition, or financial systemic risks that could arise with big tech. Since in many cases, big tech companies have activities that are crossborder, coordination among national and international authorities will be critical to insure that there are uniform regulations and supervision of big tech.

According to the Bank for International Settlements’ report “Big tech in finance: opportunities and risks” released today, the role of big techs in finance raises numerous issues that go beyond traditional financial risks, such as credit, market, or liquidity risks. Tackling these risks “requires striking a balance between financial stability, competition and data protection. Regulators need to ensure a level playing field, taking into account big techs’ wide customer bases and particular business models.” Dr. Hyun Song Shin, Economic Adviser and Head of Research at the BIS, explained that “The aim should be to respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks.” Importantly, Song Shin stated that “Public policy needs to build on a more comprehensive approach that draws on financial regulation, competition policy and data privacy regulation.”

In February of this year, I read the Financial Stability Board’s (FSB) research about big tech and fintech and agree with the FSB that BigTech Poses A Greater Threat To Financial Institutions Than FinTech. At the moment, banks and big tech each have competitive advantages and disadvantages. It is important to remember that since big tech companies are not regulated like banks, they do not have the capital, leverage, and liquidity constraints that banks do. Hence, big tech has significant opportunity to move faster until regulators and legislators can figure out how big tech financial service activities will be regulated.

Whereas there can be many advantages of big techs providing credit to a wide range of borrowers, especially the unbanked, regulators will need to be attuned to what biases these firms’ data and algorithms may have when decided to whom to extend credit and at what price.  The BIS noted that big techs’ role in financial services brings efficiency gains and lowers barriers to the provision of financial services.  However, the very features that bring benefits also have the potential to generate new risks and costs associated with market power. Once a captive ecosystem is established, potential competitors have little scope to build rival platforms. Dominant platforms can consolidate their position by raising entry barriers.”

Bank for International Settlements data show that presently, financial services represent about 11% of big tech’s revenues.  The largest amount of big tech subsidiaries are in Asia-Pacific and North America.

Big tech has moved into financial services extensively in China. These companies have also been expanding rapidly in other emerging market economies (EMEs), notably in East Africa, Latin America, and Southeast Asia, East Africa. In the UK and the U.S., fintech has more of a share in providing credit than big tech.

According to the BIS, “The uneven expansion of total fintech credit appears to reflect differences in economic growth and financial market structure. Specifically, the higher a country’s

per capita income and the less competitive its banking system, the larger total fintech credit activity.”  Importantly, the BIS report noted that “The big tech credit component has expanded more strongly than other fintech credit in those jurisdictions with lighter financial regulation and higher banking sector concentration.”

Regulating big tech’s financial services activities will not be easy.  Policies will be not only encompassing typical financial regulation but will also require regulation into competition and data privacy. “Even when the objectives are clear and uncontroversial, selecting the policy tools to secure the objectives – the means towards the ends – requires taking account of potentially complex interactions.”  According to the BIS, “to navigate the new, uncharted waters, regulators need a compass that can orient the choice of potential policy tools. These tools can be organized along the two dimensions, or axes, of a ‘regulatory compass.’ The north-south axis of the compass spans the range of choices over how much new entry of big techs into finance is encouraged or permitted. North indicates encouragement of new entry, while south indicates strict restrictions on entry. The second dimension in the compass spans choices over how data are treated in the regulatory approach. It ranges from a decentralized approach that endows property rights over data to customers (east), to a restrictive approach that places walls and limits on big techs’ use of such data (west).”

With last week’s announcement that Facebook is launching its cryptocurrency, Libra, more and more light will be shone on big techs' expansion into the financial sector. “With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users, “said Chairperson of the U.S. House Financial Services Committee Maxine Waters.  In a press release, Waters made it clear that she wants regulators involved in protecting consumers.  “The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy. Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks, and trading risks that are posed by cryptocurrencies. Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action.” She also recommended that “Facebook executives should also come before the Committee to provide testimony on these issues.”

Before Facebook’s announcement, representative of the big tech giant did meet with professionals of the Bank for International Settlements. A BIS representative stated that it was “a courtesy meeting built around points in the white paper,’ but would not state who was at the meeting or when it took place.

Source: Forbes.com

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