"Big tech" may be a bigger competitive threat to financial institutions than fintech, according to a Financial Stability Board report.
The report, published Feb. 14, is part of the Switzerland-based body's efforts to monitor the impact of innovation on financial stability.
The relationship between fintech firms and incumbent financial institutions appears to be "largely complementary and competitive in nature," the Financial Stability Board said.
For the most part, it said, fintech firms have simply been too small to make a meaningful dent in the traditional financial services industry.
"Fintech firms have generally not had sufficient access to the low-cost funding or the customer base necessary to pose a serious competitive threat to established financial institutions in mature financial market segments," the report said.
Partnering with banks, insurers and wealth management firms is increasingly becoming the way that fintechs achieve scale and distribute their products, the report said.
But "big tech" firms such as Facebook Inc., Tencent Holdings Ltd., Baidu Inc. and Amazon.com Inc., which are increasingly involved in providing payment services, insurance and short-term credit are another matter altogether.
"The competitive impact of big tech may be greater than that of fintech firms. Big tech firms typically have large, established customer networks and enjoy name recognition and trust," the report said.
In many cases, "big tech" companies have access to proprietary customer data created through services such as social media, which allows them to better target products to customers, according to the Financial Stability Board. Not only this, but tech giants also tend to have strong financial positions and ready access to low-cost funding, which would be out of reach of newer, smaller fintechs. Their existing large customer networks also allow them to scale extremely quickly, the report noted.
This will lead to increased competitive pressure on incumbent financial institutions, but it will not necessarily make markets more competitive.
This is because the large market shares of a handful of large firms could lead to greater concentration in the hands of just a fewer players, according to the report. A "striking example" of concentration already taking place in is the mobile payments industry in China, where just two firms account for 94% of the total market. Concentration could be a potential risk to financial stability in future, the Financial Stability Board said.
The report also warned that if incumbent financial institutions come to rely more on third-party data services providers, such as cloud storage companies, there could be a new concentration of risk in the global financial architecture.
"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. Thus, while increased reliance on third-party providers specializing in cloud services may reduce operational risk at the individual firm level (idiosyncratic risk), it could also pose new risks and challenges for the financial system as a whole," the report said.