Central banks and other regulators need to move quickly to deal with the growing influence of large technology firms on finance, the Bank for International Settlements has warned.
he Swiss-based bank, which is known as the central bank for central banks and which helps shape global financial rules, said in a report yesterday that ‘big tech’ had huge advantages due to their scale and the large amount of data they held on potential customers.
Regulation of big technology platforms like Facebook, Google and Amazon has tended to focus on data protection issues and privacy, especially in Europe.
The bank warned in a report that the current inancial regulation “is likely to fall short of an adequate response” to big tech’s move into finance.
The paper was written by Agustin Carstens, the general manager of the bank, and three senior colleagues.
They warn that current regulations don’t take account of the new risks thrown up as big technology companies move into finance.
The paper specifically references the scale of US players Google and Facebook and Chinese mobile payments giants Alibaba Group and Tencent, noting how big technology firms can grow rapidly after they shift into financial services, quickly rolling out new global products to an already huge user bases.
“The current framework does not address the potential (possibly global) systemic impact of big tech operations and of possible spillover effects to the financial sector,” the officials wrote.
Their paper notes that traditionally the regulation of electronic payments services has treated it as a niche sector, with rules drawn up at a time when the sector was characterised by relatively small specialist companies often used by migrants to wire money home. Rules “were formulated with small remittance service providers in mind”, the paper says.
However, big technology firms are already large and already hold masses of information about their customers harvested from their other platforms.
“Big tech firms entering financial services can scale up rapidly with user data from their existing business lines in e-commerce and social media, and by harnessing the inherent network effects in digital services,” the BIS says.
It potentially gives rise to new challenges in relation to concentration of market power and data governance, in addition to the traditional concerns around financial risks, consumer protection and operational resilience that apply to any financial provider, the BIS argues.
The paper says this creates a need for greater and different oversight of technology firms by financial regulators, including regulating at entity or firm level rather than the current model where a financial services provider has to hold individual licences for specific business lines, such as e-payments or lending.
The paper is evidence of mounting concern among central bankers and regulators, including the Bank of England and the US Federal Reserve, about the growing share of financial services activity that now takes place outside of the traditional banking sector.