The paper titled “‘Bigtechs’ in the Financial Domain: Balancing Competition and Stability,” was published in the monthly bulletin of the RBI.
Key highlights of the report
- The complex governance structure of ‘bigtech’ firms in the financial sector limits the scope for effective oversight and design of entity-based regulations.
- Apart from their complex structure, bigtechs can impact the risk and maturity transformation functions through their direct exposure to provision of financial services.
- At times this may also translate or lead to shadow banking activities, undermining financial stability.
- Big-techs, given their pervasive adoption as third-party service providers, generally 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.
- 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.
- Regulators across the globe, including those in China, Europe and the US, have increased the scrutiny of the bigtechs and their business models in the financial domain and are adjusting the policy frameworks to cope with the risks presented by bigtechs.
- Although bigtechs bring with them benefits of greater financial inclusion, efficient operations and lower transaction costs, they also pose the risk of stifling competition, operational resilience issues and financial stability.
Suggestions
- Addressing risks from bigtechs lies in calibrating the regulatory frameworks with a mix of entity and activity-based rules.
- The requirements for creating holding companies involved in financial activities, the activity-specific licences, requirements on data protection, security, equal treatment of third-party applications, data portability among others augur well for limiting the risks posed by bigtechs, the paper showed.
- As the interaction of bigtechs with the financial sector evolves, close cooperation between competition (anti-trust), data, governance and financial authorities are called for to design or update regulations to protect competition and promote financial stability, according to the paper.
(Source: Business Line)
