Large non-financial technology firms, referred to as “bigtechs,” pose challenges to financial stability owing to their technological advantages, large user base, wide-spread use by financial institutions and network-effects, according to an RBI paper.
Bigtechs include companies such as Alibaba, Amazon, Facebook, Google, and Tencent. They usually hold service licenses through subsidiaries or JVs with varying levels of ownership control and jurisdictional regulatory advantages. Given their clientele, it is also possible for them to create products and establish a presence with greater ease vis-à-vis nascent fintechs.
“This poses a serious barrier in creating a level playing field to promote innovation in the fintech space. Besides the technological advantages, bigtechs typically also have the financial muscle to withstand the competitive pressures,” according to the paper titled ‘’Bigtechs’ in the Financial Domain: Balancing Competition and Stability’.
Complex governance structure
The complex governance structure of bigtechs limits the scope for effective oversight and entity-based regulations. Further, due to the adoption of bigtechs as third-party service providers, they have become the underlying platform on which a host of services are offered.
“This uniquely positions the bigtechs to easily acquire cross-functional databases which can be exploited for generating innovative product offerings, making them dominant players in the market,” the paper said, adding that at times this may lead to shadow banking activities which undermine financial stability.
Bigtechs’ core businesses are in information technology and consulting, including cloud computing and data analytics, which account for 46 per cent of their revenue vis-a-vis financial services, which represents 11 per cent.
Whereas any service outage in payment services by these entities may result in disruption of financing activity, a greater threat is due to the operational risk emanating from any failure of non-financing services, which could create a significant event in financial services.
“The criticality of these services means that bigtechs may be already “too-critical-to-fail’,” the paper said.
Regulations to keep pace
Globally, regulators are wary of bigtechs’ impact on competition and market contestability, consumers’ data privacy rights, and financial intermediation and stability. As a result, regulators are realigning their frameworks to facilitate a level playing field in the fintech space while containing the plausible risks from the emergence of bigtechs, the paper said.
“With the increasing complex inter-linkages between financial institutions and tech-companies, the regulatory frameworks need to keep up the pace with innovations to contain the vulnerabilities that may arise from the new risk propagation channels,” it said.
In India, efforts have been made for local storage of payment data and to bring critical payment intermediaries into the formal framework. Initiatives are also underway to increase the payment acceptance infrastructure and creating a data protection law.
“Going forward, the regulations in EMDEs (emerging markets and developing economies) need to be mindful of the new inter-linkages that bigtechs might create with the existing financial institutions,” the paper said.