BigTech firms are playing an increasingly prominent role in the financial system and have begun to provide financial services. Some BigTech firms have grown rapidly in the past decade and, on some measures, are comparable in size or even bigger than some of the world’s largest financial institutions.
Such firms benefit from having large existing customer bases and from collecting and analysing their customers’ data. They can use this to achieve scale rapidly across different business lines, including in financial services. They also tend to have significant financial resources and are often able to access capital and funding at lower cost than some large financial groups.
BigTech firms differ in both the breadth of financial services they offer and in the nature of their interaction with incumbent financial institutions. In advanced economies (AEs), such companies’ financial activities are generally more narrow (e.g. focused on payments), and tend to complement the activities of existing financial institutions.
In emerging markets and developing economies (EMDEs), BigTech firms provide a broader range of financial services such as lending, insurance and asset management. This variation may be due to differences in financial development, approaches to financial regulation, and the penetration of financial services across different geographies.
This report examines recent developments in the provision of financial services by BigTech firms, and the resulting benefits and risks to financial stability.
Various modes of interaction
Various modes of interaction are emerging between BigTech firms and financial institutions. Some involve partnerships, for example where BigTech firms provide technology infrastructure to financial institutions. In some markets, BigTech firms also compete directly with existing financial firms. The overall response of incumbent financial institutions to BigTech firms’ entry in financial services and its effect on their business models is likely to vary across institutions and markets.
The activities of these firms in the financial services sector have numerous benefits. These include the potential for innovation, diversification and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in EMDEs where they have the potential to increase access to financial services by previously unbanked populations, improving 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.
BigTech firms’ activities may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly (including FinTech firms), and have been the subject of previous work by the FSB. These include financial risks that stem from leverage, maturity transformation and liquidity mismatches, as well as operational risks including those that might arise from potential shortcomings in governance, risk and process controls.
BigTech firms engaging in financial services may also pose risks to financial stability that are different to, or more prominent than, those from FinTech firms more generally. These risks to financial stability might be greater in countries where firms become significant providers of financial services. Such risks are, by their nature, uncertain and forward looking, given that BigTechs’ provision of financial services is relatively nascent in most jurisdictions.
Some potential risks stem from how firms could use their network and infrastructure to achieve scale in financial services very rapidly. Competition from BigTech firms might reduce the resilience of financial institutions, either by affecting their profitability or by reducing the stability of their funding.
BigTech’ widespread access to valuable customer data could also be self-reinforcing via network effects. The scale and complexity of linkages between BigTech and financial firms could also act as channels for the propagation of risk. Such linkages arise from financial institutions’ dependence on third-party services provided by some BigTech firms.
Other linkages arise through BigTech firms’ partnerships with financial institutions to originate and/or distribute financial products. 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.
A further overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions. If this were to occur, the failure of these firms could lead to widespread disruption. In particular, this might be a risk if BigTech firms’ activities in financial services were not accompanied by appropriate risk management and regulatory monitoring, or if BigTech firms’ customers were not able to readily switch to other providers of financial services.
These developments raise a range of issues for policymakers. The activities of BigTech firms in financial services may be subject to regulation in most jurisdictions. There is a question, however, of whether additional regulation and/or financial oversight may be warranted.
Regulators and supervisors might also be mindful of the degree to which the resilience of incumbent financial institutions and the viability of their business models might be affected by their interlinkages with and competition from BigTech firms. Finally, BigTech firms’ ability to leverage wide-ranging customer data raises considerations for authorities regarding policies governing data ownership, access and portability.
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