BIS Tests CBDC with Banks; FIS Examines Tech Firm Licensing Regime

Recently, several big tech and fintech firms have obtained a banking license in various jurisdictions. Despite the regulatory scrutiny that accompanies a banking license, a number of big tech and fintech firms see the value proposition that it confers. Asia, and in particular China, is home to the largest number of big tech firms that operate with a banking license. Numerous fintech firms have also been granted bank charters in the United Kingdom and, to a lesser extent, in the European Union and the United States. Access to low-cost deposits that complement their product offerings, the cost savings associated with eliminating the need for partner banks, the perceived trust and legitimacy that a banking license bestows, and the possibility that investors may reward such firms through higher market valuations more than offset the costs associated with operating as a bank. This paper assesses the benefits and risks of extending banking licenses to big tech and fintech firms. The findings are based on publicly available information on applicable licensing requirements in seven jurisdictions covering Asia, Europe and North America: China, European Union, Hong Kong SAR, Korea, Singapore, the UK, and the US. A key focus of the paper is to compare the merits of bank ownership by tech firms in relation to ownership by commercial or industrial non-financial companies. To help differentiate their risk characteristics, this paper classifies technology firms into three distinct groups: 

• Standalone fintech firms whose financial activities are conducted solely or primarily through their banking entity
• Large diversified fintech firms that engage in a broader range of (mainly) financial services through various channels, including the parent entity level, their subsidiary bank, and other non-bank subsidiaries, joint ventures, and affiliates
• Big tech firms with core non-financial businesses in social media, internet search, software, online retail, and telecommunications, who also offer financial services as a secondary business line

The question of whether to allow technology firms to operate with a banking license has the potential to permanently alter the landscape of national banking systems. Big tech firms and large diversified fintech firms pose the most significant supervisory concerns, with the former requiring more onerous prudential measures than the latter. To mitigate the perceived risks, authorities impose various quantitative and qualitative requirements during authorization, but supervision and enforcement may pose formidable challenges. In this context, the paper outlines a range of policy options that are mapped to the risk profile of technology firms seeking a banking license, to help support the gatekeeping role of prudential authorities. In devising applicable licensing criteria, authorities should consider technology firms’ distinct business models and their inherent risk characteristics, including their ability to scale at unprecedented speeds. Prudential authorities, as gatekeepers of the banking system, must decide whether to allow entry to these new gatekeepers of the digital economy and, if so, what requirements to impose on them. At one end of the spectrum is prohibiting or creating formidable barriers, while at the other is developing an enabling regulatory environment to facilitate their entry. The space between these theoretical extremes provides scope for prudential authorities to consider policy trade-offs that are appropriate for their jurisdiction-specific circumstances.

Related Links

• Press Release on CBDC
• Report on Project Helvetia Phase II (PDF)
• FSI Paper on Tech Firms

Keywords: International, Switzerland, Banking, Lending, Regtech, Bank Licenses, Project Helvetia, Digital Currencies, Bigtech, SNB, FSI, BIS