According to the Bank for International Settlements (BIS), the entry of large technology firms (‘big techs’) such as Alibaba, Amazon, Facebook, Google and Tencent into financial services holds the promise of efficiency and gains that can enhance financial inclusion. This is contained in the Bank’s June 2019 Annual Report. The BIS distinguishes ‘big techs’from Fintech. It describes Fintech as “technology-enabled innovation in financial services, including the resulting new business models, applications, processes and products.
“While Fintech companies are set up to operate primarily in financial services, big tech firms offer financial services as part of a much wider set of activities. Big techs’ core businesses are in information technology and consulting, such as cloud computing and data analysis which account for around 46% of their revenues. Financial services represent about 11%.” From my candid observations, the entry of big techs into financial services make their distinction from fintech blurred to some consumers or observers.
The Annual Report also states that: “Big techs have typically entered financial services after they secured an established customer base and brand recognition. Their entry into finance reflects strong complementarities between financial services and their core non-financial activities, the associated economies of scope and scale.”
This striking note on “complementarity” resonates with views of the International Monetary Fund (IMF) contained in its ‘Fintech Notes – The Rise of Digital Money’, July 2019 as published.
The DNA of big techs
The big techs’ DNA, to my mind, provides a holistic and simple understanding of how they leverage on people’s information (data) for commercial gains. In extenso, the report states:
”Data analytics, Network externalities, and interwoven Activities (‘DNA’) constitute the key features of big techs’ business models. These three elements reinforce each other. The ‘network externalities’ of a big tech’s platform relate to the fact that a user’s benefit from participating on one side of a platform (for example, as a seller on an e-commerce platform) increases with the number of users on the other side (for example, buyers).”
Indeed, “Network externalities beget more users and more value for users. They allow the big techs to generate more data, the key input into data analytics. The analysis of large troves of data enhances existing services and attracts further users. More users, in turn, provide the critical mass of customers needed to offer a wider range of activities, which yield even more data. Accordingly, network externalities are stronger on platforms that offer a broader range of services and represent an essential element in the big techs’ life cycle.”
DNA’s feedback loop
In this regard, the report further notes: “Financial services both benefit from and fuel the DNA feedback loop. Offering financial services can complement and reinforce big techs’ commercial activities. The typical example is payment services, which facilitate secure transactions on e-commerce platforms or make it possible to send money to other users on social media platforms. Payment transactions also generate data detailing the network of links between fund senders and recipients. These data can be used both to enhance existing (for example, targetted advertising) and other financial services, such as credit scoring”.
Data Sources and Synergies
To my point of view, the availability of people’s information (data) from such sources to the big techs’ influences their inter-relationships with other users in the ecosystem. Hence, “The source and type of data and the related DNA synergies vary across big tech platforms. Those with a dominant presence in e-commerce collect data from vendors, such as sales and profits, combining financial and consumer habit information. Big techs with a focus on social media have data on individuals and their preferences, as well as their network of connections. Big techs with search-engines do not observe connections directly, but typically have a broad base of users and can infer their preferences from their online searches”.
These types of synergies vary with the nature of the data collected. Data from e-commerce platforms can be a valuable input into credit scoring models, especially for SME and consumer loans. Big techs with a large user base in social media or Internet searches can use the information on users’ preferences to market, distribute and price third-party financial services (for example, insurance).
One weakness that has been identified with banks is that – although they have many customers to whom they offer a wide range of services including wealth management insurance products or mortgages – they have, so far, not been as effective as big techs at harnessing the DNA feedback loop.
This can be attributed to the requirement of “the required separation of banking and commerce in most jurisdictions (countries). As a result, banks have access mostly to account transaction data only. Moreover, legacy IT systems are not easily linked to various other services through, for instance, Application Programming Interfaces (APIs). Combining their advanced technology with richer data and a stronger customer focus, big techs have been adept at developing and marketing new products and services”.
Big techs’ Potential Costs
The BIS re-echoes the fact that: “Big techs’ role in financial services brings efficiency, gains and lowers barriers to the provision of financial services; but the very features which bring benefits also have the potential to generate new risks and costs associated with market power”.
Market Power and Risks
What’s more, “Once a captive ecosystem is established, potential competitors have little scope to build rival platforms. Dominant platforms can consolidate their position by raising entry barriers. They can exploit their market power and network externalities to increase user-switching costs or exclude potential competitors. Indeed, over time big techs have positioned their platforms as ‘bottlenecks’ for a host of services.
“Platforms now often serve as essential selling infrastructures for financial service providers, while at the same time big techs compete with these providers. Big techs could favour their own products and try to obtain higher margins by making financial institutions’ access to prospective clients via their platforms more costly. Other anti-competitive practices could include ‘product bundling’ and cross-subsidising activities. Given their business model, these practices could reach a larger scale for big techs.
“Another emerging type of risk identified with the big techs’ commercial activities is anti-competitive use of data. So, given their scale and technology, big techs can collect massive amounts of data at near-zero cost. This gives rise to ‘digital monopolies’ or ‘data-opolies’. Once their dominant position in data is established, big techs can engage in price discrimination and extract rents”.
Misuse of Data
Downsides of the big techs’ business model have also been highlighted in the 94-page report. Thus, “They may use their data not only to assess a potential borrower’s creditworthiness, but also to identify the highest rate the borrower would be willing to pay for a loan or the highest premium a client would pay for insurance. Price discrimination does not only have distributional effects – for example, raising big techs’ profits at customers’ expense without changing the overall amounts produced and consumed. It could also have adverse economic and welfare effects. The use of personal data could lead to the exclusion of high-risk groups from socially desirable insurance markets”.
In addition to that, “There are also some signs that big techs’ sophisticated algorithms used to process personal data could develop biases toward minorities. The idea that people’s preferences are malleable and are subject to influence for commercial gain is not new. But the scope for such actions may be greater in the case of big techs, due to their command over much richer customer information and their integration into their customers’ everyday life…. They may be able to influence users’ sentiment without the users themselves being aware of it”.
Considered as the Banker of central banks in their pursuit of monetary and financial stability, the Bank for International Settlements (BIS) re-emphasises that the traditional aim of financial regulation, globally, is to ensure the solvency of financial institutions and soundness of the entire financial system. In this regard, regulators consider capital and liquidity requirements in their scheme of things.
Therefore, “When big techs’ activity falls squarely within the scope of traditional financial regulation, the same principles should apply to them”. In Ghana, the new Payment Systems and Services Act,2019 (Act 987) as amended, regulates institutions (including the emerging fintechs) which carry on payment services and electronic money business but not the technology firms (‘big techs’).
In general, the BIS noted that: “Two additional features make the formulation of the policy response more challenging for big techs. First, big techs’ activity in finance may warrant a more comprehensive approach that encompasses not only financial regulation but also competition and data privacy objectives. Second, even when the policy goals are well-articulated, the specific policy tools should actually be shown to promote those objectives.
“This link between ends and means should not be taken for granted. This is because the mapping between policy tools and the ultimate welfare outcomes is more complex in the case of big techs. In particular, the policy tools that are aimed at traditional financial regulation objectives may also impinge on competition and data privacy objectives and vice versa. These interactions introduce potentially complex trade-offs that do not figure in traditional financial regulation.”
That’s all for now! Thank you for reading. Your comments/feedback are welcome. God bless You!
This script was written by a Chartered Banker with a flair for feature writing. He works for a company that provides financial services. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside. Email: Kwaku.Anumu@gmail.com