BIS throws spotlight on big tech in finance

In recent years, big tech firms have creeped - and in some areas charged - into the financial services arena, joining fintech firms in challenging banks. Speaking at the FT Banking Summit last week, the General Manager of the Bank for International Settlements (BIS) outlined some of the key challenges this poses for policy makers and called for a coordinated international response among regulators.

Here are some of our takeaways from the speech

Big techs v fintechs
“While fintech firms offer financial services with digital technology, big tech firms approach from the other direction: their primary business is technology and not finance”

Agustín Carstens, General Manager, Bank for International Settlements

Having started with payments, big techs have recently been expanding in the financial arena, offering services such as lending, insurance and wealth management, in markets across the world. 

Whilst driven broadly by the same demand and supply factors as fintech firms, their business models are fundamentally different. This can have an impact on their relative successes in different markets and their effects on society. 

Global trends in fintech credit
The development of fintech credit (including big tech credit) varies greatly across economies. China has by far the highest levels of fintech credit per capita, but there are also significant levels in the UK and US. In each of these countries, fintech firms have dominated the market. Interestingly, in some countries where there is much less fintech credit presence as a whole (such as Argentina and Brazil), big tech firms have had a far larger share of the market.
 
This highlights that the successes of big tech and fintech firms are driven by different factors. And BIS analysis shows that big tech appears to get a bigger boost from less financial regulation than fintech firms do – a key point for regulatory concern.
 
Unique features of the big tech finance model
  1. Data driven credit decisions

    Big tech firms have access to huge amounts of customer data from their digital footprints. They can use this data to more reliably inform credit extension decisions.

    They also typically rely solely on the data when it comes to default decisions - and enforcement is often a fully automated process.
  2. Originate-to-distribute model

    Whereas traditional commercial banks collect small deposits and channel them into large loans, many big techs extend the loans first and then raise the money to fund them.

    Funding sources differ between firms – some rely on internal sources and/or syndicated loans and others rely mainly on securitising and selling off the debt.
  3. Dominance in payments systems

    Certain big techs dominate in the payments sector. Customers often maintain large balances with them to use their payment services - at 0% interest. These balances can contribute to big techs’ internal sources of funds.
“The market capitalisation of large technology companies is in some cases bigger than the world’s largest financial institutions.”

Agustín Carstens, General Manager, Bank for International Settlements

Key policy challenges
Diversifying the financial system with new entrants has the potential to drive innovation and efficiency. But the unique features of big techs pose some challenges for policy makers. For example:

Financial stability
 
  • The automation of credit withdrawal decisions means a downturn in the market could quickly result in a credit crisis.
  • Credit models that rely on disposing of the debt entirely can pose threats to the borrower (by changing lender incentives) and to investors (who may suffer from information gaps). 
  • Liquidity risks arise from using payment balances, which are callable on demand, as a primary source of funding for long term risky debt.
  • Big techs taking large payment balances from the public and depositing them into banks creates a parallel banking system that is not properly overseen by the central bank.

Anti-trust

  • The further expansion of big techs could lead to new forms of concentration, market power and systemic importance.
  • If the entry of big techs into finance is driven primarily by market power and relies on exploiting regulatory loopholes and a captive market (rather than being driven by efficiency gains), this could encourage banks into new forms of risk taking.

Managing data

  • The exploitation of extensive amounts of data raises issues relating to data privacy, consumer protection and cyber-security.
  • Moral questions also arise when artificial intelligence begins predicting creditworthiness using (or extrapolating) sensitive data such as race, religion and gender.
What happens next?
A key concern of BIS is that the expansion of big tech in finance should be driven by efficiency gains (such as better access to information) rather than the cost advantage of avoiding the current regulatory system.
To harness the promise of big tech whilst managing its risks, BIS has called on global regulators to:
 
  • think about how big tech firms fit within the current regulatory framework and how regulation should be organised;
  • provide a secure and level playing field for all participants while at the same time fostering innovation and competition in financial markets; and
  • work together, cooperate and share information with other supervisors around the world.
It will be interesting to see how regulators respond to this challenge.