How Big Techs Are Changing the World of Finance - And What It Means for You

You probably use big tech services every day. You search for information on Google, shop on Amazon, chat on Meta (Facebook), watch videos on YouTube, and pay with your smartphone.

But did you know that these big tech companies are also entering the financial sector and offering services like payments, credit, insurance, and investment?

Big techs are large companies whose primary activity is digital services, rather than financial services. They have access to massive amounts of data from their users, which they use to provide personalized and convenient financial solutions. They also benefit from network effects, meaning that the more users they have, the more valuable their services become.

Sounds great, right?

Well, not so fast. While big techs in finance can bring some benefits, such as efficiency and financial inclusion, they also pose some serious challenges and risks. These include:

• market dominance,
• price discrimination,
• algorithmic bias,
• data privacy, and
• financial stability.

In this blog post, which is inspired by the recent publication from BIS titled "Big techs in finance", we will explain how big techs operate in finance, what opportunities and challenges they create, and what public policy can do to address them. We will also give you some tips on how to protect yourself and make informed choices when using big tech financial services.

Read my other posts here: Conventional Finance - FinFormed, Islamic Finance - FinFormed, Takaful - FinFormed, Career - FinFormed and Randow Writings - FinFormed

Big Techs Have a Unique Business Model in Finance

Big techs have a distinctive business model in finance that relies on three elements: data analytics, network externalities, and interwoven activities. These three elements reinforce each other in a feedback loop that gives big techs a competitive edge over traditional financial institutions.

Data analytics refers to the use of big data and machine learning to process and analyze large amounts of information from various sources. Big techs use data analytics to offer customized and tailored financial services to their users, such as credit scoring, risk management, and product recommendation.

Network externalities refer to the phenomenon that the value of a service increases with the number of users. Big techs benefit from network externalities because they operate as online platforms that connect different groups of users, such as buyers and sellers, or senders and receivers of money. The more users join the platform, the more attractive it becomes for others to join as well.

Interwoven activities refer to the fact that big techs offer a wide range of services that are complementary and interconnected. For example, big techs can use their e-commerce platforms to offer payment services, which in turn generate data that can be used to offer credit or insurance services. By offering multiple services, big techs can increase customer loyalty and cross-sell products.

Combining these three elements creates a powerful feedback loop that enables big techs to grow rapidly and dominate markets.

Big Techs in Finance Can Create Opportunities and Challenges

The entry of big techs into finance can have both positive and negative impacts on consumers, businesses, and society at large. On the one hand, big techs can bring some opportunities, such as:

• Efficiency: Big techs can reduce costs and friction in providing financial services by using advanced technology and data analytics. For example, big techs can offer faster and cheaper payments than traditional methods, or provide credit without requiring collateral or extensive documentation.
• Financial inclusion: Big techs can reach underserved segments of the population that lack access to formal financial services, such as small businesses or low-income individuals. By using alternative data sources and machine learning techniques, big techs can offer financial products that are tailored to the needs and preferences of these customers.
• Innovation: Big techs can foster innovation in the financial sector by introducing new products and services that meet changing customer demands and expectations. For example, big techs can offer digital wallets that integrate various functions such as payments, savings, investments, and loyalty programs.

On the other hand, big techs in finance can also pose some challenges and risks, such as:

• Market power: Big techs can quickly attain a dominant position in the market due to their network effects and economies of scale and scope. This can reduce competition and consumer choice in the financial sector, as well as create barriers to entry for new entrants or incumbents. Moreover, big techs can abuse their market power by engaging in predatory pricing, cross-subsidization, bundling products, or discriminating among customers.
• Price discrimination: Big techs can use their massive amounts of data to extract rent and price-discriminate among their customers. This means that they can charge different prices to different customers based on their willingness to pay, rather than on the cost of providing the service. This can lead to unfair and inefficient outcomes, as well as erode consumer surplus and welfare.
• Algorithmic bias: Big techs can use algorithms whobased on big data and machine learning to make decisions that affect their customers, such as credit scoring, risk assessment, or product recommendation. However, these algorithms can develop biases that reflect the data they are trained on, or the objectives they are optimized for. This can result in unfair and discriminatory treatment of certain groups of customers, such as minorities, women, or low-income individuals.
• Data privacy: Big techs can collect and store large amounts of personal and sensitive data from their users, which they use to provide financial services. However, this raises concerns about the security and protection of these data, as well as the consent and control of the users over their own data. Big techs can misuse or mishandle these data, or share them with third parties without the users’ knowledge or permission. This can expose users to identity theft, fraud, or cyberattacks, as well as violate their privacy and dignity.
• Financial stability: Big techs can have systemic implications for the stability of the financial system, especially if they become large and interconnected with other financial institutions. Big techs can pose operational risks due to their reliance on technology and data infrastructure, which can be vulnerable to disruptions or failures. Big techs can also pose credit risks due to their exposure to borrowers who may default or become delinquent. Moreover, big techs can pose liquidity risks due to their reliance on short-term funding sources or market-based financing, which can be subject to sudden withdrawals or fluctuations.

Public Policy Can Address the Trade-offs Between Opportunities and Challenges

The entry of big techs into finance, driven by the DNA feedback loop, has the potential to disrupt established paradigms and requires a new and holistic regulatory approach. The challenge for public policy is to strike a balance between the opportunities and challenges that big techs create while ensuring a level playing field for all market participants.

Public policy can address the trade-offs between different policy goals, such as financial stability, competition, privacy, consumer protection, and financial inclusion. To do so, public policy needs to adopt a comprehensive and coordinated framework that covers four main dimensions:

• Activity-based regulation: Regulation should focus on the activities and functions that big techs perform in the financial sector, rather than on their legal status or organizational form. This means that big techs should be subject to the same rules and standards as other financial service providers that perform similar activities, regardless of whether they are banks or non-banks. This would ensure a level playing field and avoid regulatory arbitrage.
• Data regulation: Regulation should address the issues related to data collection, processing, sharing, and protection by big techs. This means that big techs should comply with data privacy laws and regulations that protect the rights and interests of data subjects. This would also require big techs to obtain informed consent from users before collecting and using their data and to ensure the security and integrity of their data infrastructure. Moreover, regulation should promote data openness and interoperability among different platforms and providers, to enhance competition and consumer choice.
• Platform regulation: Regulation should address the issues related to market power and conduct by big tech platforms. This means that big tech platforms should be subject to antitrust laws and regulations that prevent anti-competitive practices such as abuse of dominance, predatory pricing, cross-subsidization, bundling products, or discriminating among customers. This would also require big tech platforms to ensure fair access and treatment for third-party providers that use their platforms as distribution channels or intermediaries.
• Macroprudential regulation: Regulation should address the issues related to systemic risk and spillovers by big techs in finance. This means that big techs should be subject to macroprudential laws and regulations that monitor their size, interconnectedness, complexity, substitutability, and cross-border activities. This would also require big techs to maintain adequate capital buffers, liquidity reserves, risk management practices, resolution plans, and contingency arrangements.

Public policy also needs to adopt a cross-sectoral and cross-border approach that involves coordination and cooperation among different authorities within and across jurisdictions. These authorities include central banks, financial regulators, competition authorities, data protection authorities, consumer protection agencies,¹⁹ and law enforcement agencies. By working together in a coherent and consistent manner, these authorities can ensure effective oversight and supervision of big techs in finance, and foster international standards and best practices.

How You Can Protect Yourself and Make Informed Choices When Using Big Tech Financial Services

Big techs are changing the world of finance in unprecedented ways. They offer new and innovative financial services that can benefit consumers and businesses alike. However, they also pose some risks and challenges that need to be addressed. As a user of big tech financial services, you can protect yourself and make informed choices by following these tips:

1. Be aware of the risks: Understand the potential risks associated with using big tech financial services, such as data privacy, price discrimination, algorithmic bias, and financial stability. Make sure you are comfortable with these risks before using the services.
2. Read the terms and conditions: Always read the terms and conditions of any financial service you use. This will help you understand what you are agreeing to, including how your data will be used and what fees you may be charged.
3. Protect your data: Be careful about what personal information you share with big tech companies. Use strong passwords, enable two-factor authentication, and be wary of phishing attempts.
4. Shop around: Don’t just use a financial service because it’s offered by a big tech company you already use. Shop around and compare different options to find the best one for your needs.
5. Stay informed: Keep up-to-date with the latest news and developments in the world of finance and technology. This will help you make informed decisions about which services to use and how to use them safely.

Remember, knowledge is power. The more you know about big techs in finance, the better equipped you will be to navigate this new landscape.

P.S. What do you think about big techs in finance? Do you use any of their services? Share your thoughts and experiences in the comments below. I’d love to hear from you. #bigtech #finance

Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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