The Bank for International Settlements (BIS), often described as the bank for central banks, has issued its annual report for 2019, expressing concerns over the expected disruption as big tech firms like Facebook enter the financial space.
While titled “Big tech in finance: opportunities and risks,” the report looks at the risks and challenges posed by companies such as Alibaba, Amazon, Facebook, Google and Tencent, and rather pays lip service to the potential benefits of this building fintech revolution.
These firms have developed huge customer bases, says BIS, and have the benefit of a “data-network-activities loop” which gives them ” the potential to become dominant.”
While the encroach of such companies into payments, money management, insurance and lending has only just started, it brings the potential for major change in the finance industry.
On the benefits, BIS writes:
“Big techs’ low-cost structure business can easily be scaled up to provide basic financial services, especially in places where a large part of the population remains unbanked. Using big data and analysis of the network structure in their established platforms, big techs can assess the riskiness of borrowers, reducing the need for collateral to assure repayment. As such, big techs stand to enhance the efficiency of financial services provision, promote financial inclusion and allow associated gains in economic activity.”
However, such change brings new risks, according to the report. As well as the old issues of financial stability and consumer protection, “big techs have the potential to loom large very quickly as systemically relevant financial institutions.” At this point, BIS specifically raises the recent reports of Facebook’s new Libra project, which sees the social media giant “considering offering payment services for their customers on a global basis.”
There are also “important new and unfamiliar challenges” that, BIS suggests, go beyond the remit of current regulations. The report says that “Big techs have the potential to become dominant through the advantages afforded by the data-network-activities loop, raising competition and data privacy issues.”
As such, policies will be needed for a “comprehensive approach” on financial regulation, competition policy and data privacy regulation.
“The aim should be to respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks. As the operations of big techs straddle regulatory perimeters and geographical borders, coordination among authorities - national and international – is crucial,” according to the report.
In a somewhat telling statement, BIS further reveals its fears that banks could lose ground to the new big tech disruptors saying:
“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.”
And with such major companies having the ability to work across borders, international coordination is needed on rules and standards to address the potential shift in the “risk-benefit balance,” says BIS.
As the report suggests, Facebook’s crypto project may not have an easy time with the world’s regulators as the firm seeks to launch financial services for its billions of users.