BCBS – Regulating big techs in finance

August 2, 2021
Background Tech Concerns:
Centrality of data in digital economy has enabled entry into financial services and rapid growth of big tech firms, can expand from existing businesses into financial services. Can overcome limit to scale, by using user data from existing business to grow rapidly. This growth can lead to greater user activity, and in turn generates more data for firm. Quickly gain presence in finance sector, using this data-network-activities (DNA) loop. However, this gives rise to concerns about emergence of dominant firms with excessive concentration of market power, with a possibly systemic footprint in financial system. Also presents various policy challenges, such as mitigation of financial risks, consumer protection, oversight of operational resilience, but also new and unfamiliar challenges. New challenges of potential for excess concentration of market power, wider issues related to data governance, lie outside experience of central banks, but can impact their mission.

Expansion to Payments and Beyond:
Basel bulletin reviews policy challenges for central banks and regulators in oversight of activity of big tech firms in financial services, especially as relates to payment system. Retail payments market is stark example of potential for rapid concentration, can gain users using DNA loop but also reinforce this through merger and acquisition activity. Beyond payments, big techs have also become lenders to individuals, and small firms in some markets, as well as offering insurance and wealth management services. Even in jurisdictions where big techs are not yet dominant, potential for rapid growth warrants close attention from central banks, who must anticipate new developments. Need to formulate policy based on scenarios where big tech initiatives may already have reshaped the payment system, instead of focusing on current market structure.

Market Dominance and Data Governance:
Possible concern is that when big tech firms achieve dominant position, economics of platform
competition may lead to merchant fees that exceed the current high costs. Important policy imperative arises from data governance, and whether consumers trust big techs to safeguard their personal data, survey conducted shows they don’t. Data governance and privacy lies outside traditional policy scope of central banks, but close cooperation is needed between central banks and data governance authorities. Need to work together on open banking, the data portability rules, protocols regarding data transfers whether domestic or international, and the role of public infrastructure.

Entity-Based Regulation:
Current framework to regulate financial services follows an activities-based approach. Requires providers to hold licenses/regulatory approval for their specific business lines. For payments, as with other business lines, licensing requirements vary by jurisdiction. Activities-based approach is likely to fall short for policy challenges posed by big tech. It is better to develop specific entity-based rules to complement that current approach. Examples of entity-based approach for big techs is taking root in jurisdictions notably EU, China and US, led by competition authorities, connected to central banks’ mission. Need for close coordination among different financial and non-financial regulators at both national and global level, re potential systemic impact of big tech operations. Central banks and financial regulators should invest with urgency in monitoring and understanding these developments, so are ready to act quickly should they need to.

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