By Tsering Namgyal
A push into finance by the likes of Facebook could further weaken the position of the legacy banks by increasing competition and pose many risks to consumers, notably in areas such as data privacy, the Bank of International Settlements (BIS) has warned.
Global and national watchdogs need to be vigilant given the ease with which Big Tech firms could grow their finance business by grabbing market share from traditional lenders.
“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 BIS warned in its annual report released on Monday (June 23).
Tech giants such as Google, Amazon and Facebook have a natural advantage given the ability with which they could leverage their network effect to sell products and services to their users often amounting to billions.
The BIS urged the regulators to engage in policy discussions about Big Tech’s entry into finance. These conversations need to happen at the nexus of financial stability, competition policy, and data privacy; and more policy coordination is needed internationally.
Besides concerns about financial stability, some of these developments could be alarming, especially if the finance business of the large tech platforms come to rival the big banks in terms of size.
This has happened, for instance, in China where firms such as Ant Financial have grown aggressively in an area that was previously only lightly regulated. Besides the lack of regulations, their success can be largely attributed to their clever use of such new innovations in artificial intelligence and data analytics to make credit decisions.
The global tech firms could emulate their Chinese counterparts, the report said.
“In some settings, such as the payment system, big techs have the potential to look large very quickly as systemically relevant financial institutions,” warned the BIS, which is owned by global central banks.
In the immediate term, data privacy is perhaps the biggest concern, the Basel-based BIS said, since Big Techs can harvest a large amount of customer information at virtually no cost, often unbeknownst to the customers. These could give birth to “digital monopolies” or “data-opolies” that could create significant entry barriers for new and smaller players.
“Once their dominant position in data is established, big techs can engage in price discrimination and extract rents,” the report warned.
“They may use their data not only to assess a potential borrower’s creditworthiness, but also to identify the highest rate the borrower would be willing to pay for a loan or the highest premium a client would pay for insurance.”
In some situations, these practices could reinforce existing social biases and even lead to discrimination against minorities.
Same Activity, Same Regulation
More importantly, if the Big Techs are carrying out banking activities, they should be subject to bank regulations in keeping with the mantra of “same activity, same regulation,” the BIS said. This is already happening in terms of imposing basic anti-money laundering and know-your-customer (KYC) rules on payments.
But additional regulations could be needed given the paradigm-shifting nature of new innovations and their purveyors at the tech giants, the BIS said.