At the end of a week in which Facebook announced a major new payments project and the UK’s central bank said it would allow more non-banks into the core of its financial infrastructure, the Bank for International Settlements (BIS) took a much more cautious stance on tech firms’ access to finance.
In a special chapter of its widely followed Annual Report, the BIS warned that granting tech firms an unconditional pass to the financial sector would be a grave mistake.
No free pass for tech
The BIS plays a crucial role as a forum for policy discussions among those charged with maintaining the stability of the world’s financial system.
Its bi-monthly policy meetings, held in Basel, Switzerland, bring together the heads of all the major global central banks. It also hosts the most important committees supervising the global financial infrastructure.
In its new report, the BIS said that allowing large tech firms into financial services could make things more efficient and allow more people to access financial services.
However, added the BIS, their arrival could create competitive concerns, and regulators need to ensure there’s a level playing field in future between big techs and banks.
In last year’s annual report, the BIS criticised cryptocurrencies, saying the underpinning of trust in digital currencies like bitcoin is fragile.
The BIS warned that giving unconditional access to finance for tech firms could create powerful monopolies.
Tech firms can easily apply to finance the data skills they have acquired from running social media or commerce networks, the BIS said. Combined with their scale, this would make making them instantly competitive.
“An essential by-product of the tech firms’ business is the large stock of user data, which are utilised as input to offer a range of services that exploit natural network effects, generating further user activity. Increased user activity then completes the circle, as it generates yet more data,” the BIS said.
The BIS warned that, if left unsupervised, this virtuous circle could help tech firms rise to an unassailable competitive position.
“Dominant platforms can consolidate their position,…exploit their market power or exclude potential competitors,” it said.
Earlier this week Facebook released details of a planned digital coin called Libra, which, it says, will serve as a new digital medium of exchange for the 2bn users of the firm’s social media networks.
Techs have firm foothold in Asia
As a sign of big tech firms’ increasingly confident steps in finance, the BIS provided evidence that tech had already moved from an initial focus on payments to encompass a range of activities, including credit provision, money management and insurance products.
Tech firms’ progress in finance is most advanced in China, where payment services alone represent 16 percent of the country’s economy.
For the tech giants, adding financial services to their range of businesses offers natural synergies, the BIS said.
“Offering financial services can complement and reinforce big techs’ commercial activities,” the BIS said.
“The typical example is payment services, which facilitate secure transactions on e-commerce platforms or make it possible to send money to other users on social media platforms,” the BIS continued.
“Payment transactions also generate data detailing the network of links between fund senders and recipients. These data can be used both to enhance existing (e.g., targeted advertising) and other financial services, such as credit scoring.”
Need for coordination
The BIS warned that financial sector regulators or central bankers should not be left to deal alone with the challenge of regulating tech firms’ access to finance.
Instead, the Basle-based institution said, anti-trust and privacy regulators must join the discussions.
“Public policy needs to build on a more comprehensive approach that draws on financial regulation, competition policy and data privacy regulation,” the BIS said.
Newer thinking on the type of regulation appropriate for tech firms may also be needed, it said.
“Big techs’ entry to finance presents new and complex trade-offs between financial stability, competition and data protection,” it said.
And politicians and regulators will need to synchronise their efforts when supervising tech firms, which already make clever use of their global reach, the BIS said.
“As the operations of big techs straddle regulatory perimeters and geographical borders, coordination among authorities – national and international – is crucial,” it said.
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Last month, the head of payments at the BIS spoke to New Money Review in an exclusive podcast interview: listen to it here
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