Be wary of Big Tech’s increasing reach into financial services, says Agustín Carstens, general manager for the Bank of International Settlements (BIS).
In a speech late last week, Carstens said that Big Tech needs monitoring as it broadens its scope of services into credit and beyond. He added that Facebook’s Diem, in particular, needs scrutiny.
Carstens delivered his remarks as part of a BIS conference titled “Regulating big tech: Between financial regulation, antitrust and data privacy.”
He said that the rise of Big Tech firms offering payments, credit, insurance, wealth management and more in every major region of the world has been a remarkable one: “Big Techs were virtually nonexistent in financial services only a decade ago. But thanks to network effects, where users attract more users, Big Techs have achieved scale rapidly.”
Carstens noted that Big Tech-enabled credit grew by 40% in 2020 alone, to a total of $700 billion.
Among the advantages tied to larger tech firms’ ascendancy in financial services: Credit has become more accessible for smaller firms, the cost of onboarding new clients has declined, and previously underserved individuals have been able to tap into a range of banking services and products.
The remarks come against a backdrop where last year, PYMNTS’ research showed that 34.2% of those studied would be “very” or “extremely” likely to use or already use banking-like services from PayPal and other Big Tech firms, and 27.5% would be “very” or “extremely” likely to use or already use banking-like services from digital and online banks.
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Carstens’ recent speech noted that along with the rise of Big Tech in finance, for central banks and for regulators, the direct challenge “centers on financial stability.” Data have helped boost network effects, he said, with a net result that Big Tech firms within financial services can move from “too big to ignore” to “too big to fail.”
By way of scale and scope, Carstens noted that only four firms provide two-thirds of global cloud services. A concentration of data within only a few providers means those same providers are vulnerable to operational failures or cyberattacks. The competitive landscape bears watching, he said, lest power and market share be at risk of “tipping” to one player or another.
Carstens cautioned that data governance is a challenge, in an age where artificial intelligence (AI) and other advanced technologies can be used to “manipulate” consumers’ preferences.
Drilling down into some of the competitive threats, Big Tech could “establish a large footprint in retail payments by providing their own means to pay,” with their own back-end systems that could represent a threat to the traditional public payments system.
Further, Big Tech firms could issue their own stablecoins, with a nod to Facebook’s Diem. Those stablecoins could challenge big bank models and negatively impact demand for deposit activity.
Carstens recommended that Big Tech be managed through the adaptation of existing regulations and oversight.
“Competition policy is the most active area, where a paradigm shift is emerging,” he said. “Authorities aim to preserve market contestability by strengthening ex post enforcement tools. But they are also developing new entity-based regulation that would constrain business practices of Big Techs.” He pointed to the proposed European Digital Markets Act, the Chinese Platform Antimonopoly Guidelines and a number of legislative proposals in the United States.
“Going forward, Big Techs’ growth will require additional regulatory responses. Most likely, this will include entity-based rules. Relying only on activity-based requirements will not be enough,” Carstens noted.