The BIS Annual Economic Report 2019 undertook a review of the opportunities and risks for large technology firms (“big techs”) who have ventured into financial services over the last two decades. The established customer base and brand recognition secured by big tech firms and the innovative fintech used, complement their expansion into financial services. For example, it's widely acknowledged that payment services companies like Alipay and Paypal have transformed e-commerce platforms, enabling guaranteed settlement at delivery for sellers and reclaims by buyers.
The report highlights three key findings:
1) The possibility of efficiency gains and increased financial inclusion from the entry of the major big tech firms such as Alibaba, Amazon, Facebook, Google and Tencent into the market. Due to, for example, low-cost business structures, ability to scale and reach populations who remain unbanked, as well as utilisation of big data and analysis of the network structure in their established platforms to assess borrowers.
2) The fine line between big techs and banks, with a particular focus on the need for Regulators to ensure a level playing field given the access of big tech firms to a wide customer base, information and broad-ranging business models. This is becoming increasingly important as the operations of big techs overlap geographical borders and regulatory jurisdictions.
3) A potential lack of competition may raise barriers to entry and the ability for dominant players to increase user switching costs or exclude competition through anti-competitive prices, such as product bundling or cross-subsidisation activities. There is a concern that these practices could lead to a new type of risk, the anti-competitive use of data. Big techs with a dominant position labelled ”digital monopolies” or “data-opolies” may have the opportunity to engage in price discrimination and extract rents, such as misusing data to determine the highest premium a client would be willing to pay for insurance. Thus negatively influencing financial stability, the level of competition and data protection.
“Same activity, same regulation”: Given the race to the top and the global impact of big techs, it is crucial to strike the right balance to limit regulatory arbitrage between big tech and traditional banks.
Big techs’ core businesses are in information technology and consulting (eg cloud computing and data analysis), which account for around 46% of their revenues. Financial services represent about 11%. While big techs serve users globally, their operations are mainly located in Asia and the Pacific and North America. Their move into financial services has been most extensive in China, but they have also been expanding rapidly in other emerging market economies (EMEs), notably in Southeast Asia, East Africa and Latin America.