The finance industry today looks very different from what it used to be a few years ago. While the legacy banks are still a significant part of the industry, the sector is also witnessing the growing prominence of other platforms, which are also helping meet the dynamically changing demands of the customers. These are often termed as BigTech firms and according to several media and research reports, they are increasingly becoming a part of every household. So, are these BigTech firms trying to replace banks or banks have a bright future in sync with these institutions, explores Rashi Aditi Ghosh of Elets News Network (ENN).
What are BigTech?
As mentioned in a report titled FinTech, BigTech, and the Future of Banks by Harvard Law School Forum on Corporate Governance, BigTech firms are “technology companies with established presence in the market for digital services”.
Outbreak of Covid and the Changed Landscape of Banking
The sudden outbreak and the ongoing challenges of Covid-19 pandemic have pushed the financial services sector in accelerating its digital transformation. Although, the enthusiasm towards technology was always a part the BFSI sector but the experts definitely believe that the speed of deployments is way faster now and the digital journey of banks are no less than a five year leap. While covid is definitely credited as the catalyst but some reports also point out BigTech companies as the reason behind this growth as banks have now started to feel competition.
What’s the Challenge?
In June this year, a union representing the State Bank of India (SBI) and a global alliance had requested the Reserve Bank of India (RBI) to restrict big firms from setting up payment networks, stating that privatisation could compromise data safety, as reported by reuters.com.
In 2020, RBI has invited companies to create a payments network. This was reportedly aimed at reducing concentration risks in the payments sector.
Several companies namely Amazon, Google, Facebook and others had submitted their applications for such licences in partnership with Indian companies such as Reliance and ICICI Bank.
As reported by Harvard Law School Forum on Corporate Governance, BigTech firms can FinTech innovations way faster than traditional banks as they already have the advantage of digital platform. The report titled FinTech, BigTech, and the Future of Banks, posted by René M. Stulz (Ohio State University), posted on November 20, 2019 says that BigTech firms are potentially more of a threat for the future of banks than FinTech firms. At the same time, however, the advantages of BigTech will manifest themselves in consumer finance and lending to SMEs, not in investment banking. After having seen the U.S. banking system evolve towards the universal bank model, we may see it evolve towards a system with large investment or merchant banks and large consumer banks. Such an evolution could be problematic as a strong deposit base was an asset for banks during the global financial crisis and is likely to be so in other periods of stress.
Regulator’s Take on BigTech
In July this year, RBI stated that the plans to introduce BigTech companies to India’s financial sector may create challenges for the traditional banks as the tech firms, according to RBI, hold caliber to dominant in financial services.
If further stated in its bi-annual financial stability report that, BigTech may also create governance-related problems for regulators, the Reserve Bank of India (RBI) wrote in on Thursday.
The RBI said the challenges may range from operational risks, cybersecurity and data privacy. However, the benefits would be pertaining to efficiency gains and more access to financial services.
Trends in the growth of BigTech in finance
According to report titled BigTech and the changing structure of financial intermediation by Bank for International Settlements, the financial services activities of BigTech have grown rapidly in some economies, particularly in payments, lending to small and medium enterprises (SMEs), and other specific market segments.
It further states that, while most BigTech firms start in payments, often to facilitate their “core” business (e-commerce, advertising, etc.), there is considerable diversity in the sequencing of business areas and how they conduct payments services.
In payments, available data suggest that China is by far the largest market, with BigTech mobile payments for consumption reaching RMB 14.5 trillion in 2017, or 16% of GDP, says BIS.
“The United States, India, and Brazil follow at a distance, with BigTech mobile payments of 0.3-0.6% of GDP. The key distinction is between the use of existing payments infrastructure, such as credit or debit cards or partner banks, or building a separate payments infrastructure. In countries where the incumbent bank-based payment infrastructure is dominant – such as the United States, Europe, and Korea – innovations in payment services like Google Pay, Amazon Pay, Apple Pay, Samsung Pay, and payments on Facebook messenger all rely on existing payment rails.”
“The new credit card product by Apple and Goldman Sachs, announced in March 2019, will also operate through existing credit card infrastructure (Apple, 2019). This trend may relate to the high penetration of credit cards and bank accounts in the population and hence the ability to build on the network effects associated with well-developed payments infrastructures. By contrast, Ant Financial’s Alipay, Tencent’s WeChat Pay, Vodafone M-Pesa and Mercado Libre’s Mercado Pago all involve a separate payments infrastructure that is integrated with these firm’s related core products (namely a mobile e-commerce and services platform, a messaging and social media platform, mobile phone credit, and an e-commerce platform, respectively).”
“The differences are revealing, and may relate to the lack of credit card and other payments infrastructure in these markets. Often, BigTech firms charge lower fees than incumbent providers, and operate with low margins. In a number of cases, such payments services may offer complementary benefits to their core business, and for this reason may even be cross-subsidised by other business lines of the firm.”
According to a CB Insights report, Big tech’s investment in fintech companies was witnessed around $2.2 billion last year.
Why Regulating BigTech in Finance is Pivotal
- Big tech firms entering financial services can scale up rapidly with user data from their existing business lines in e-commerce and social media, and by harnessing the inherent network effects in digital services.
- In addition to traditional policy concerns such as financial risks, consumer protection and operational resilience, the entry of big techs into financial services gives rise to new challenges surrounding the concentration of market power and data governance.
- The current framework for regulating financial services follows an activities-based approach where providers must hold licences for specific business lines. There is scope to address the new policy challenges by developing specific entity-based rules, as proposed in several key jurisdictions – notably the European Union, China and the United States.
Source: Regulating big techs in finance, BIS
Expanding Reach of BigTech in India
India is witnessing a major growth in its digital payments segment as new players are entering the gamut and investing heavily.
Players like Facebook and its apps, Messenger, Instagram and Whatsapp are planning to consolidate its payments stratrgies soon. Others like Amazon, Apple too are termed as the biggest contenders in India’s payments market, and can create huge competition.
It is significant to note that the Ecommerce industry is acting as great support for these players to expand their payments services.
While BigTech companies and their expansion in India and the worldwide is likely to see a promising growth, as reported by several media houses and research reports. It would be interesting to see how the traditional banks in the country react to this and try to stay ahead in the race with relevant deployments at all stages.