From Basel and Brussels to Brasilia and Beijing, regulators have become increasingly twitchy about the world’s biggest technology companies – ‘BigTech’ – disrupting banking.
The expansion of the celebrated US-born GAFA quartet (Google, Apple, Facebook and Amazon) into financial services has typically attracted most attention. But Ant Group’s recent shake-up to satisfy Chinese regulators illustrates the topic’s global nature.
Each BigTech has its own battles. In the case of Facebook (FB), for example, regulators have hardly so far been (ahem) ‘liking’ plans for its proposed Diem (formerly Libra) payments project; and Brazil’s central bank last year suspended mobile payments through FB-owned WhatsApp.
Although BigTech’s forays into finance increase consumer choice, potentially lowering costs and aiding financial inclusion, concerns ultimately centre on potential risks to financial stability as a whole. No small beer.
So, governments and regulators are stepping up their scrutiny. At a national level, for example, France’s competition watchdog, Autorité de la concurrence, launched a consultation last year focusing on the role of ‘large digital platforms’ in payments. The Netherlands Authority for Consumers & Markets ran a similar review, calling for a ‘level playing-field’ for all payment services providers.
It’s all part of the narrative of political unease about BigTech’s growing power (particularly over data). FB’s recent ‘unfriending’ of Australia, as prime minister Scott Morrison put it, is an ongoing, high-profile example of the high-stakes arena, while the UK is to shortly launch a Digital Markets Unit to (in the government’s words) ‘introduce and enforce a new code to govern the behaviour of platforms that currently dominate the market, such as Google and Facebook’.
Speaking at a #DisruptionBanking-partnered (virtual) event last month, financial markets commentator Chris Skinner was forthright about BigTech’s influence:
International financial authorities are sprinting to keep up.
“Global tech giants, the so-called BigTechs, are setting the pace of change,” said the European Central Bank’s Fabio Panetta during a webinar hosted by Brussels think-tank Bruegel earlier this month. “They are seeking to side-step traditional distribution networks, including payment systems, through their control of social media, online marketplaces and mobile technologies. This could lead to the rapid and large-scale take-up of the financial services offered by BigTechs.”
Concerns abound for the regulators. “Integration with other services provided by BigTech companies may threaten competition through tying, bundling, cross-subsidisation and winner-takes-all dynamics,” Panetta told Bruegel’s audience. “This could crowd out traditional intermediaries. Finally, BigTechs may contribute to a rapid take-up of stablecoins, which could create systemic risks and even endanger monetary sovereignty.”
European Securities & Markets Authority chair Steven Maijoor sang from a similar hymnsheet at the 5th Annual FinTech and Regulation Conference (which also took place earlier this month), saying: “We can expect these huge firms to win market share in the financial sector. Not only have they been bolstered by the crisis, but they enjoy competitive advantages such as vast customer networks and access to cheap funding. The tailored services that BigTechs offer, based on their customer data, can improve quality for clients. Integrating services across platforms may be convenient for many of us. But it brings risks, such as around competition. Even if the entry of BigTechs into certain financial services promotes competition at first, they may grow dominant.”
But do you regulate the activity or the entity? At present BigTechs require licences to perform specific activities (for example, payments) whereas banks are subject to entity-based regulation.
There is a strong case for relying more, and not less, on entity-based regulation, according to a paper, ‘Fintech regulation: how to achieve a level playing-field’, published by the Bank for International Settlements (BIS)-hosted Financial Stability Institute (FSI) on 2 February. FSI chairman Fernando Restoy highlights in the 27 pages (which contain, on p4, a particularly useful table on licences held by major BigTechs in selected jurisdictions) that specific entity-based rules for BigTechs, particularly in the areas of competition and operational resilience, might be the best way to go.
BIS’s economic adviser and head of research, Hyun Song Shin, set out how an entity-based approach is gaining ground in major jurisdictions during ‘A holistic look at Big Tech regulation’, a discussion organised by the Washington DC-based Peterson Institute for International Economics (PIIE) on 10 February. In the final quarter of 2020 alone, the European Union stepped forth with its Digital Services Act and Digital Markets Act proposals (key objective: a level playing-field); DC lobbyists were poring over a monster 450-page ‘Investigation of Competition in the Digital Marketplace: Majority Staff Report and Recommendations’ US report; and China’s State Administration for Market Regulation issued draft rules (formalised earlier this month) aimed at preventing monopolistic behaviour by internet platforms.
In the PIIE webinar BIS’s Shin outlined BigTechs’ revenue sources via a pie-chart: 11 per cent currently comes from finance, compared to 46 per cent from ‘IT’ and 22 per cent from ‘consumer goods’.
“The takeaway for me from the chart is that BigTech will work very hard not to jeopardise the 89 per cent, regardless of how tempting that 11 per cent looks,” said Shin’s fellow panellist Mastercard’s Rory MacFarquhar (who has formerly worked for Google and the US National Security Council, and emphasised that he was speaking in his capacity as a former PIIE visiting fellow). “There will be a great desire to avoid entering highly regulated industries in any frontal way, certainly in a way that could lead to not just the regulation of the specific subsidiary that’s engaged in financial services but also the group as a whole. Because however profitable the financial goose is, it’s nothing like the goose in their core businesses that is laying golden eggs every minute.”
But BigTechs have already moved, significantly beyond ‘tempted’, into different areas of financial services (it’s more than a couple of years since the Economist noted how BigTech was ‘taking aim’ at the ‘low-profit retail banking industry’ – and indeed more than a quarter of a century since Bill Gates famously said that ‘banking is necessary, banks are not’).
BigTech is “nibbling around the edges” in financial services, MacFarquhar observed, “where they try to take advantage of the adjacency of their business, be it e-commerce or social media, to financial services without entering the fully regulated part of the financial services industry in particular taking consumer deposits.”
“In some jurisdictions you will see BigTech firms becoming banks,” he said. “But I would conjecture that there will be an inverse correlation between the interest of these tech firms in becoming banks and the stringency of financial regulation of those banks.”
Then there’s BigTech’s interest in cloud services. PIIE senior fellow Nicolas Véron (chairing the webinar) asked whether cloud service providers will be increasingly regulated under financial frameworks. “When you have maybe three cloud service providers for an entire banking system, that’s something the regulators are going to have to think about,” said MacFarquhar.
Does China – which, in MacFarquhar’s words, has “reasserted the primacy of banks in the payments system” – offer clues as to BigTech’s plans? “China is the exception that proves the rule about what BigTech wants to do in the financial sector because it marched into finance exactly as it didn’t face significant regulations, and now the regulations have come back and BigTech is on the retreat,” he said. “I think that’s actually a useful lesson for the rest of the world that we are not going to see BigTech voluntarily subjecting their entire operations to the scrutiny of central banks just in order to capture the relatively low margins and low returns that financial businesses offer.”
Also, what will the new Biden administration’s approach be in the US? The FT offered takes from Wall Street a fortnight ago, with its report including a graph showing how tech companies’ (Washington) lobbying spending has recently exceeded that of banks.
There are reasons for that.
By Ian Hall
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