Big technology firms such as Amazon, Facebook, Twitter, and Google “may pose risks to financial stability” if they get more heavily involved in providing financial services, according to the Financial Stability Board (FSB), the organization tasked to monitor how the world’s largest banks operate.
The FSB believes that—due to their dominant positions, the amount of customer data they hold, and the revenues and resources at their disposal—these firms could quickly gain an advantage in providing financial services, particularly if they use their clout to leverage their networks of third parties or partner with smaller players to win market share. They could also destabilize established players by denting their profitability.
One of the FSB’s chief concerns is that big technology companies—which are relatively few in number—might come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions, which could lead to widespread market disruption if one of them failed.
To offset concerns over unfair competition, the FSB suggests Big Tech might need to share data on financial services customers with banks and financial technology firms, in much the same way banks in Europe and elsewhere are required to share customer data with third-party FinTech companies that want to offer rival payments services.
The FSB also says an increased presence by Big Tech in the sector could pose problems for regulators as oversight and monitoring could be more difficult to carry out given how different their operating models are to those of traditional financial firms and the extent to which providing financial services makes up their business offering.
“In some jurisdictions, there may arise questions of which financial regulation is applicable to Big Tech firms carrying out financial activities, and the degree to which such firms are bound by financial regulation,” says the FSB in its report, titled Big Tech in finance: Market developments and potential financial stability implications.
The report adds financial authorities might benefit from close engagement with other regulatory agencies (such as competition authorities and data privacy regulators) because of the overlapping nature of the services the likes of Amazon and Google provide.
The international banking regulator—set up in the aftermath of the 2008 financial crisis—says the presence of Big Tech in financial services “may highlight the need to complement an entity-based approach with an activity-based approach to regulation … to ensure appropriate and consistent coverage of activities that have implications for financial stability.”
Another problem highlighted in the report is that while large technology firms providing financial services will be exposed to the same risks that are inherent to the rest of the sector—such as leverage, maturity transformation, and liquidity mismatches, as well as operational risks—they will have less experience in identifying, controlling, and mitigating them.
Currently, the services being offered by these firms are generally “narrow,” meaning they are focused on payments, and tend to complement the activities of existing financial institutions. Amazon, Facebook, eBay, Alipay, and Google, for example, have all acquired payments-related licenses in European Union countries including Luxembourg, Ireland, and Lithuania, although most have not yet built up any big volumes yet.
However, in emerging economies such as China, big technology firms offer a broader range of financial services such as lending, insurance, and asset management. They have also brought financial services within reach of underserved communities and are particularly active in the market for lower-value payments, including those associated with retail transactions. For instance, the share of transactions processed by non-bank payment institutions in China increased from 59 percent of the total number of payments made in 2013 to 76 percent in 2017.