According to a report by the Financial Stability Board (FSB), regulators will need to rethink how data is shared among financial sector participants as a greater number of BigTech firms enter the financial services market.
BigTech firms – large companies with established technology platforms, companies like Alibaba, Amazon, Apple, Baidu, eBay, Facebook, Google and Microsoft – are playing an increasingly prominent role in the financial system and have begun to provide financial services. They can use their large existing customer base to achieve scale rapidly across different business lines, including in financial services, and they tend to have significant financial resources and are often able to access capital and funding at lower cost than some large financial groups.
Commenting on the topic, the FSB states: “The entry of BigTech firms into financial services raises a range of issues for policymakers. The potential for BigTech firms to achieve scale in financial services very rapidly highlights an overarching need for policymakers to stay abreast of developments, and their implications for systemic risk. It also underscores the importance of cooperation and communication between regulatory and supervisory authorities, including those charged with overseeing the bank and non-bank sectors. Such international cooperation – including via fora such as the FSB – is important given such firms are typically global in nature.”
The FSB is established to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies.
Risks for financial services
The report highlights that the arrival of BigTech firms in financial services sector poses a host of stability risks that may require sweeping new laws to level the playing field with smaller tech firms and banks. The risks, like with traditional financial insitutions and FinTech firms, can include those that stem from leverage, maturity transformation and liquidity mismatches, and lax governance, risk and process controls.
The report adds: “Such risks are, by their nature, uncertain and forward looking, given that BigTechs’ provision of financial services is relatively nascent in most jurisdictions.”
Further, competition from BigTech firms might reduce the resilience of traditional financial institutions, either by affecting their profitability or by reducing the stability of their funding, or where the scale and complexity of their linkages with financial firms (such as through third-party services provision or product distribution partnerships) could also act as ‘channels for the propagation of risk’.
Where these interlinkages with traditional financial institutions may be a source of risk, the report says ‘vigilant monitoring’ may be warranted. In some jurisdictions, there may also be a need to coordinate supervision of BigTech financial activities with the supervision of financial institutions’ use of third-party services from the same firms.
The FSB says: “These risks may be particularly significant if such financial services are not readily substitutable, and if BigTech firms’ risk management and controls are less effective than those required of regulated financial institutions”.
Sankar Krishnan, Executive Vice President, banking and capital markets at Capgemini predicts BigTech firms will increase their disruption of the payments ecosystem in 2020.
“I think we are going to see in 2020 more BigTech involvement in banking and payments. And banks will continue to be industrial utilities like they always have been,” Krishnan said. “Their status as industry and utilities leaders is getting even more prominent as the front-end customer experience models are all going to be run by big tech, because of the fact that they have better technology, better personalisation in terms of what works for each consumer.
“Because someone like Google, like Apple has got a track record in terms of customer preferences, customer likes on the App Store, I think we are going to see more personalisation of payments.”
The activities of BigTech firms in the financial services sector have numerous benefits. These include the potential for innovation, diversification and efficiency in the provision of financial services. BigTech firms can also contribute to financial inclusion, particularly in EMDEs where they have the potential to increase access to financial services by previously unbanked populations. BigTech firms may also improve financial inclusion and facilitate access to markets that were previously untapped, a particularly important benefit for small and medium-sized enterprises (SMEs) competing with incumbents in financial services. The third-party services offered by BigTech firms also may provide access to technologies like artificial
intelligence and data analytics capabilities previously unavailable to the wider marketplace.
With regards to BigTech, treasurers needs to ponder about one prospect: Will the traditional treasury software suppliers and banks need to up their game in order to deliver relevant Open Banking solutions, or will we see the rise of fintechs and even big techs in the treasury space?
The report from FSB is available here.