Regulators must be mindful of BigTech interlinkages with financial institutions: Financial Stability Report

As large technology companies, often termed as ‘BigTech’, scale up and turn into “too-critical to fail” institutions, regulators must be mindful of their interlinkages with the financial system, the Reserve Bank of India (RBI) said in the June 2022 Financial Stability Report (FSR).

“BigTechs can scale up rapidly and pose risks to financial stability, which can arise from increased disintermediation of incumbent institutions. Moreover, complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour,” the RBI said in the report.

The regulator has earlier taken umbrage at banking entities tying up with BigTech firms to deliver their products to customers. An example of this was Equitas Small Finance Bank’s partnership with Google Pay to sell the bank’s fixed deposits.

The latest edition of the FSR includes a survey of international regulatory and supervisory practices as applied to BigTech entities. In its survey of financial service offerings by BigTech companies, the RBI listed Google, Apple, Facebook, Amazon and Alibaba among the service providers.

Globally, regulators are aiming to strike a balance between risks and benefits from the entry of BigTechs in the financial domain, the RBI said. “Regulators are adopting licensing/ authorisation approach both at the entity and activity level, and the same is being guided by the principle of ‘proportionality’ and ‘flexibility’ depending on the complexity of services offered by the BigTechs,” the FSR said.

Regulators and supervisors across the world highlight three major concerns around the presence of BigTechs in financial services. These concerns are with respect to financial stability, governance and legislative issues. 

The FSR pointed out that while BigTechs entered the financial domain mainly as payment service providers, they are now offering a host of financial services including credit, asset management, insurance and crowdfunding. They increase financial stability risks by bundling several financial activities through their platforms. Their rising operational interconnectedness with financial incumbents through outsourcing partnerships also enhances risks to financial stability.

BigTechs also have a complex governance structure typically spreading across jurisdictions, offering financial services through subsidiaries and holding companies. “This makes the task of identifying and monitoring the risks they pose to the financial system challenging. Moreover, BigTechs are emerging as “too-critical to fail” institutions as they become major providers of outsourced services (e.g., cloud services) to financial institutions,” the RBI said. Governance concerns stem from ensuring supervisory access to test the resilience of the critical services outsourced to BigTechs, especially relating to cross border service arrangements.

BigTech firms occupy a dominant position in non-financial domains, often raising antitrust concerns. They also have the potential to impact competition and market contestability in the financial domain, the FSR said. The key competitive advantage of BigTechs is the large stock of user data that they generate from their non-financial platforms which often creates data privacy and anti-competition issues. 

“Any re-bundling of financial services by BigTechs may effectively reduce the choices available to the consumers, which may especially challenge retail finance models of open banking regime. Their all-pervasive outreach over domains and geographies poses serious challenges for legislatures across the jurisdictions,” the RBI said.

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