June 23, 2019

BIS has pre-released a chapter of the BIS Annual Economic Report; this chapter focuses on the risks and opportunities presented by large technology firms (big techs) in the financial services sector. The chapter highlights that the entry of big techs presents new and complex trade-offs among financial stability, competition, and data protection. Regulators need to ensure a level playing field between big techs and banks, taking into account big techs' wide customer base, access to information, and broad-ranging business models.

The chapter begins with a description of big techs' inroads into finance. It then analyzes the reasons for the entry of big techs into finance and how the business models of big techs can create competitive advantages over banks. Finally, the chapter analyzes the potential effects of big techs on financial intermediation and discusses possible implications for public policy. The chapter also highlights that big techs have ventured into lending, mainly to small and medium enterprises and consumers. Lending decisions of big techs are linked to the processing of large quantities of information (big data) using advanced analytical methods such as machine learning and network analysis (artificial intelligence). Big data relevant for financial services obtained directly from big tech platforms include transactions (sales volumes and average selling prices); reputation-related information (claim ratio, handling time, reviews, and complaints); and industry-specific characteristics (sales seasonality, demand trend, and macroeconomic sensitivity). This can be also enriched by using non-traditional data obtained via social media and other channels.

The entry of big techs such as Alibaba, Amazon, Facebook, Google, and Tencent into financial services, including payments, savings, and credit, could make the sector more efficient and increase access to these services, but also introduces new risks, the BIS writes in its Annual Economic Report. In offering financial services, big techs both compete and cooperate with banks. BIS notes that these companies offer many potential benefits, including enhanced efficiency of financial services provision, facilitating financial inclusion and promoting associated gains in economic activity. However, big techs' entry into finance introduces additional elements into the risk-benefit equation. The role of big techs in finance raises issues that go beyond traditional financial risks, according to BIS. Tackling these requires striking a balance between financial stability, competition, and data protection.

Regulators need to ensure a level playing field, taking into account wide customer bases and particular business models of big techs. As big techs' move into financial services accelerates, expanding beyond regulatory perimeters and geographical borders, policymakers will need institutional mechanisms to help them work and learn together. Coordination among authorities—national and international—is crucial to sharpening and expanding their regulatory tools. Banks are subject to regulations that govern their activities and their market entry is subject to strict licensing requirements. Similarly, when big techs engage in banking activities, they must be subject to the same regulations that apply to banks. The aim is to close the regulatory gaps between big techs and regulated financial institutions to limit the scope for regulatory arbitrage through shadow banking activities. To this end, regulators have extended existing banking regulations to big techs. The basic principle is "same activity, same regulation."

 

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Keywords: International, Banking, Big Tech, Big Data, Credit Risk, Regulatory Arbitrage, Shadow Banking, BIS

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