FSB urges vigilance on big tech in financial services

The Financial Stability Board´s report, entitled Fintech and Market Structure in Financial Services, identifies three areas where the interaction between financial systems and technology could pose a systemic risk. They are:

1. The emergence of providers of bank-like services such as FinTech credit or payments, which may impact markets and bank behaviour.
2. The entry of large, well-established technology firms into financial services (‘BigTech’).
3. The provision of important services by third parties - such as data provision, physical connectivity, and cloud services.

But while the authority is calling for closer oversight, it is also clear that it sees the partnerships of technology and financial services as an overwhelmingly positive trend that ultimately is adding value to the lives of people and businesses.

The report echos closely views already expressed by BBVA Group Chairman Carlos Torres Vila who recently told an audience at the Paris Fintech Forum how digital transformation was profoundly, and positively, changing both the banking industry and society at large.

However he too expressed concern at the significant challenges embedded in the changes, and called for a unified approach to regulating both financial and non-financial data and the businesses that use them, led by the G20.

ln its new report the FSB, which was setup to coordinate supervisory approaches at an international level, starts by noting how new entrants into the financial services space, including fintech firms and large established technology companies (BigTech), could materially alter the universe of financial services provision.

It states: “Technological innovation holds great promise for the provision of financial services, with the potential to increase market access, the range of product offerings, and convenience while also lowering costs to clients.

“At the same time, new entrants into the financial services space, including FinTech firms and large, established technology companies (‘BigTech’), could materially alter the universe of financial services providers.”

It continues that in its view, this could in turn affect the degree of concentration and contestability in financial services, with both potential benefits and risks for financial stability.

Warningly, it adds: “This could lead to additional risk taking among incumbents in order to maintain margins. Moreover, there could be new implications for financial stability from BigTech in finance and greater third-party dependencies.”

Explaining its position, the FSB report states that to date, the predominant relationship between fintech and big banks has been of partnership - the former not having sufficient access to low cost funding of big enough customer bases to challenge at scale. Partnering, the report adds, allows them to viably operate while the bigger players get to benefit from their innovations and often, culture.

Yet that is not the same for the big tech entrants into the sector, with the FSB noting the Amazons, Facebooks and Googles of the world do cause competitive dynamics.

The report says: “BigTech firms typically have large, established customer networks and enjoy name recognition and trust. In many cases, these companies could also use proprietary customer data generated through other services such as social media to help tailor their offerings to individual customers’ preferences. Combined with strong financial positions and access to low-cost capital, BigTech firms could achieve scale very quickly in financial services.

“This would be particularly true where network effects are present, such as in payments and settlements, lending, and potentially in insurance. Cross-subsidisation could allow BigTech firms to operate with lower margins and gain greater market share. Hence, while BigTech firms could represent a source of increased competition for incumbent financial institutions, in some scenarios, their participation may not result in a more competitive market over the longer term.”

Lastly, the FSB said its third area of concern related to the increasing reliance by financial institutions on third-party data service providers - for example for data provision, cloud storage and analytics, and elements like physical network connectivity. Although the authors note that current reliance is low, it is expected to grow exponentially as the power of data and always-connected requirements increases.

The report adds the risk here is that a failure in any of these elements, lying as they do outside of the direct control of the banks using them, could have serious implications across the sector.

It states: “If high reliance were to emerge, along with a high degree of concentration among service providers, then an operational failure, cyber incident, or insolvency could disrupt the activities of multiple financial institutions.”

Concluding, the authors say that none of this is critical at the moment, but that because of the  speed of change in the sector, the potential concentration of elements like data, technology and quick access to growth capital, there is a need for global supervisory bodies to watch the fintech and big tech sectors more closely to guard against risk and ensure competition and innovation flourishes.

You can read the full report here.