BIS Studies How Platform Models Impact Financial Stability & Inclusion

The paper notes that the three types of digital platforms are expanding in financial services: fintech entrants, big tech firms, and, increasingly, incumbent financial institutions with platform-based business models. These platforms can dramatically lower costs and, thus, aid financial inclusion; however these same features can give rise to digital monopolies and oligopolies. The paper examines models of fintech credit, which is lending facilitated by electronic (online) platforms that are not operated by commercial banks, and big tech credit, which is credit extended or facilitated by large companies whose primary activity is digital services. Among the emerging markets and developing economies, lending by big tech platforms is particularly relevant in China, Kenya, Indonesia, and Russia. In China, digital platforms have enabled dramatic bounds in financial inclusion, with support from public policy and regulation. In lending, empirical evidence suggests that big tech lending has helped to overcome local credit supply frictions and increase credit access for small firms. In late 2020, proposed guidelines by the China State Administration for Market Regulation and China Banking and Insurance Regulatory Commission (CBIRC) set out measures to limit monopoly risks and increase retention requirements for lending. Also, in late 2020, in response to the growth of an “originate-to-distribute” model by big tech platforms, CBIRC adapted rules on online lending and introduced a 30% retention requirement on new loans.

Many regulatory initiatives relating to platforms in finance explicitly require data portability. Open banking requirements in , for example, the EU, UK, India, and South Africa allow users to port their financial data between banks and non-bank (platform) providers. These initiatives can allow for greater user control over personal data and for greater competition between providers. However, the data portability must be carefully assessed against the risks to the privacy of users. Some have argued that fintech credit and other forms of crowdfunding can play an important role in financial inclusion if an enabling and safe environment is in place. Thus, forward-thinking policies are needed to ensure that innovation actually benefits financial inclusion and to protect a competitive environment that protects consumers, while supporting financial stability and financial integrity. To reap the benefits of platforms while mitigating risks, policy makers can apply existing financial, antitrust and privacy regulations; adapt old and adopt new regulations, combining an activity and entity-based approach; and/or provide new public infra structures. The infrastructures include digital identity, retail fast payment systems, and central bank digital currencies. These public infrastructures, as well as ex ante competition rules and data portability, are particularly promising. Yet, to achieve their policy goals, central banks and financial regulators need to coordinate with competition and data protection authorities. 

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Keywords: International, Banking, Platform Businesses, Lending, Fintech, Regtech, Open Banking, Data Privacy, Financial Stability, Financial Inclusion, Data Protection, BIS