At the intersection of two industries: Finance and technology
During a Fort Nynja webinar about digital banking, the definition of fintechs and techfins came up. Yao Jing from OneConnect drew the distinction between financial service institutions that use technology, and technology companies that offer financial services. The difference is in their backgrounds and focus.
To give an example, Yao Jing said, “Some of (banks) even spin off companies to do digital. My company spun out of PingAn Group, (which has) an insurance company and is also one of the biggest banks in China. So, a company like ours has more financial services (FS) in our DNA. So fintech is a better word to describe us.”
But besides these there are also the Big Tech companies, that offer financial services. Big technology firms like Alibaba, Facebook, Amazon, Google and so on, are the main examples of technology giants that have started to offer financial services as well, including payments, remittance, money management, insurance and lending. These companies can be broadly categorised as social networks, e-commerce platforms and search engines. These are online multi-sided platforms (MSPs) that enable and generate more direct interactions between two or more groups of users.
According to the Bank of International Settlements (BIS), the entry of these large tech firms into financial services hold the promise of efficiency gains and can enhance financial inclusion, among other things.
Also, fintechs are identified as companies set up to operate primarily in financial services. Big tech on the other hand, offer financial services as part of a much wider offering.
The data-network-activities loop
A BIS report by Economic Adviser and Head of Research, Hyun Song Shin, outlined how the business model of these tech companies, leads to a data-network-activities loop.
Simply put, big tech enables direct interaction among their users, which leads to a lot of user data being generated. This generated data leads to a range of services that “exploit natural network effects”. These services cause yet even more user data to be generated.
Above all, big techs have low-cost structure businesses that can easily scale. They can also leverage big data and analysis of their network of users to assess more easily the riskiness of their financial services users, as well as monitor their activity for ‘clues’ to a borrower’s repayment ability.
Hyun said, “Given their size and customer reach, big techs’ entry into finance has the potential to spark rapid change in the industry.”
But there are real risks to competition and data privacy as well which is where the report recommends public policy has to play its role.
The report goes, “Public policy needs to build on a more comprehensive approach that draws on financial regulation, competition policy and data privacy regulation.
“The aim should be to respond to big techs’ entry into financial services so as to benefit from the gains while limiting the risks. As the operations of big techs straddle regulatory perimeters and geographical borders, coordination among authorities – national and international – is crucial.”
Should regulators foster new firms’ entry into the banking industry by operating a liberal policy on issuing banking licenses, or should regulators restrict new entry by maintaining strict licensing requirements for new entrants?
One approach encourages new company entry as it fosters competition and reduces the incumbent’s market power, while the latter prizes financial stability and prudence, hence encourages less competition.
No matter which approach regulators decide to adopt and to what extent, Hyun’s BIS report points out that coordination among authorities is crucial, at both the international and national level.
“The mandates and practices of the three different national authorities – competition authorities, financial regulators and data protection supervisors – may not always be compatible. Financial regulators focus on the specifics of the financial sector, whereas competition and data privacy laws often impose general standards that apply to a wide range of businesses,” Hyun said.
He concluded that as digital economies expand across geographical borders, there is need for international coordination of rules and standards.