The efforts of big tech firms like Amazon and Google to get into banking poses risks to the financial system, according to a new report by the Financial Stability Board.
The international regulatory group, which monitors and makes recommendations about the global financial system, acknowledged that tech companies' financial activities could bring benefits, like the potential for innovation, diversification and efficiency in the provision of financial services. Those included being able to help with financial inclusion to reduce the number of unbanked and underbanked populations.
But those benefits might come with a significant downside risk, the FSB warned. Those included “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,” the report said.
It also feared how fast and far large tech firms could move in financial services.
“Some potential risks stem from how BigTech firms could use their network and infrastructure to achieve scale in financial services very rapidly,” the report said. “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 firms’ widespread access to valuable customer data could also be self-reinforcing via network effects.”
The scale and complexity of linkages between technology and financial firms could also bring risk.
“Such linkages arise from financial institutions’ dependence on third-party services provided by some BigTech firms,” the report said. “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.”
For instance, there’s the risk that a big tech firm that partners with a financial institution could have an operational or financial failure that prevents its customers from accessing services. The FSB also said that a small number of BigTech firms could 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,” the FSB said. “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.”
Additionally, the report raises the issue frequently brought up around big tech companies coming into financial services — what they might do with consumers’ financial data.
“BigTech firms’ ability to leverage wide-ranging customer data raises considerations for authorities regarding policies governing data ownership, access and portability,” the group said in its report.
The FSB said big tech companies have three motives for getting into financial services: to diversify their revenue streams, especially in their e-commerce businesses; to access new sources of data on the spending habits and financial positions of their clients; and to complement and reinforce their core commercial activities, for instance by adding integrated payment systems into their platforms for merchants.
These threats could bring about changes in government policies in three ways, the FSB said.
First, regulators may need to rethink the way they apply rules to tech companies, for instance by complementing an entity-based approach with an activity-based approach to regulation.
“Authorities may wish to consider the relative size and risk of both large BigTech and smaller fintech firms,” the group said.
Second, financial regulators should monitor tech companies’ linkages with financial institutions. Finally, financial authorities should rethink questions around data rights and data sharing among financial institutions and tech companies, the FSB said.
