At the same time, the BIS acknowledged tech firms moving into finance might bring benefits. Big tech firms could boost efficiency and promote wider access to credit, because their vast customer data could lower the cost of assessing borrowers for loans.
The stampede of tech firms into banking could overturn fundamental ideas in financial regulation, such as the conventional wisdom that encouraging new entrants is good for competition. The BIS said it was “far from obvious” that big tech firms’ entering banking would make the market more competitive, once their market clout and command of data analytics were taken into account.
“New entry may not increase market contestability — and competition — when big techs are envisaged as the new entrants. This is because big techs can establish and entrench their market power through their control of key digital platforms,” the BIS said in a chapter of its annual report.
Big tech firms’ control of online search, social networking, and e-commerce platforms could mean these firms face “outright conflicts of interest” when banks also relied on these platforms, the BIS said.
There was also the risk of big tech firms using data and market power for anti-competitive purposes, such as gaining a “digital monopoly” and figuring out the maximum price a customer is willing to pay for credit or insurance, it said.
Yet big tech firms may also be able to finance lending with less need for borrowers to put up assets as security, it said.
The aim should be to respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks
BIS’ head of research Hyun Song Shin
The commentary from the BIS underlines the complex task facing governments and regulators as they assess Facebook’s plan to introduce a new currency, Libra, to be backed by about 100 global corporations including Uber, Spotify and Visa.
Regulators are keen to promote competition and innovation in banking, but they must also grapple with issues such as privacy, data protection, and the fact big tech firms operate across national boundaries.
“The aim should be to respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks,” the BIS’ head of research, Hyun Song Shin, said.
The BIS, which is owned by global central banks, plays an important role in regulators’ international discussions on financial stability and banking regulation. On a call with journalists, Mr Shin said it was too early to form a specific view on Facebook’s Libra plan.
So far, Facebook’s move into finance has been met with caution from local authorities.
RBA governor Philip Lowe last week said there were “a lot of regulatory issues” that need to be addressed, and he questioned if consumers would take up the offering. The Australian Competition and Consumer Commission (ACCC), which last year proposed sweeping controls on Facebook and Google’s handling of personal data, also expressed caution over the announcement, as did other regulators.
The regulatory scrutiny of Facebook’s finance push comes as the banking industry is also coming to terms with “open banking,” a new system in which customers can take their financial data from a bank and share it with technology-based competitors.
However, the BIS officials pointed to potential risks here too, saying that big tech firms would most likely outbid competitors for consumers’ data, which may increase big tech firms’ competitive advantage over banks.
Clancy Yeates is a business reporter.