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Big tech in finance could threaten traditional bank business model, FSB says

Big tech's increasing presence in finance could affect the viability of the traditional financial institution business model, the Financial Stability Board said in a Dec. 9 report.

Technology giants have come to dominate the global landscape — in particular, Alphabet Inc.'s Google LLC, Amazon.com Inc., Apple Inc., Facebook Inc., and Microsoft Corp. in the U.S.; Alibaba Group Holding Ltd. affiliate Ant Financial Services Group, Tencent Holdings Ltd., and Baidu Inc. in China; Vodafone Group PLC in Europe; and MercadoLibre Inc. in Latin America. Some of these companies, especially those that target emerging markets, have introduced financial services outside the traditional banking networks. In the U.S., big tech firms have started to launch financial services in partnership with existing institutions.

In its report, FSB looked at potential financial stability implications of both big tech entering finance and of banks' growing reliance on third party-provided cloud infrastructure. The board listed several risks that stem from linking financial services to a big tech company.

Competition from big tech firms might "reduce the resilience of financial institutions" by affecting their profitability or reducing the stability of their funding, and regulators must consider how incumbent companies' business models are affected by links to and competition with big tech, FSB said.

"A further overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions," the FSB warned.

The failure of those firms could then lead to widespread disruption in the market if their financial services activities do not feature appropriate risk management and regulatory monitoring, or if their customers are not able to switch to other financial services providers quickly enough, the board wrote. The tech giants benefit from having huge existing customer bases, which they can use to rapidly scale up business lines when they enter new sectors.

FSB acknowledged the benefits big tech brings to financial services, including innovation and more access to banking services in developing economies.

Concern over big tech's growing crossover with the financial services industry is not new. In March, FSB Chair Randal Quarles warned of the enormous impact if big tech firms were to "cannonball" into the market. In its Annual Economic Report published in June, the Bank for International Settlements warned that big tech entering finance introduced new risks to financial stability, including big tech companies' access to data from their existing platforms.

As big tech companies grow more connected with the financial industry, the regulatory task gets more complicated. Regulators must ensure that oversight is proportionate to the relative size and risk of these big tech firms and of smaller fintech firms as well, the FSB said.

"The potential for BigTech firms to achieve scale in financial services very rapidly highlights an overarching need for policymakers to stay abreast of developments, and their implications for system risk," FSB wrote. Since these firms operate around the world, international cooperation between regulatory and supervisory authorities is needed, including those that oversee the bank and nonbank sectors.

The FSB specifically highlighted three policy implications of big tech's entrance to financial services. The international regulatory body suggested that regulation should be based on a company's activities in addition to what kind of entity it is. It also noted the need for careful monitoring of big tech companies' diverse business lines and their links to financial institutions, as well as data privacy and ownership.