Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
The Impact of Big Tech in Finance
Policy | Oct 23, 2023
Image: Pixabay/Geralt
The incursion of Big Techs into the financial sector is a double-edged sword, bringing about efficiencies and expanding access to financial services, while also posing significant challenges related to market dominance, data privacy, and algorithmic biases.
In recent years, the financial sector has undergone a transformative shift, with Big Tech companies playing a pivotal role in reshaping how financial services are delivered and consumed. From payments and credit to insurance and wealth management, the presence of Big Techs like Alibaba, Amazon, and Google is becoming increasingly pronounced.
See: G20’s Vision for Financial Inclusion through Digital Public Infrastructure
The Bank for International Settlements recently published this October 2023 'Big Techs in Finance' research paper exploring the drivers behind their rapid growth, the opportunities they bring to the table, and the challenges and risks associated with their dominance.
The Undeniable Presence of Big Techs in Finance
The foray of Big Techs into finance is driven by a combination of demand and supply factors:
- On the demand side, there is a correlation between the GDP per capita of a country and Big Tech credit activity, albeit at a decreasing rate. This suggests that as economies develop and mature, the demand for alternative credit sources rises.
- On the supply side, Big Techs have a technological edge, utilizing big data and machine learning algorithms to enhance credit decision accuracy, risk management, and regulatory compliance.
| Big Tech Company | Sector | Financial Services | Statistics |
|---|---|---|---|
| Amazon | E-commerce and Cloud Computing | Amazon Pay, Small Business Loans, Amazon Credit Cards | Issued over $5 billion in loans to small businesses since 2011 |
| Apple | Technology and Consumer Electronics | Apple Pay, Apple Card | Over 507 million users worldwide as of 2021 |
| Google (Alphabet Inc.) | Technology and Internet Services | Google Pay, Google Wallet | Over 150 million users in 30 countries as of 2021 |
| Microsoft | Technology and Software | Microsoft Pay, Investments in Fintech Startups | Active investments in various fintech startups; specific user numbers for Microsoft Pay are not disclosed |
| Facebook (Meta Platforms, Inc.) | Social Media and Technology | Facebook Pay, Novi (formerly Libra) Cryptocurrency Project | Integrated across Facebook, Messenger, Instagram, and WhatsApp, serving a combined user base of billions |
Drivers and Opportunities
🌐 Enhancing Financial Inclusion
One of the most promising aspects of Big Techs in finance is their potential to enhance financial inclusion. By reducing information and transaction costs, they make financial services more accessible, especially to underserved segments like small and medium-sized enterprises (SMEs) in remote areas. Their utilization of alternative data and machine learning techniques enables faster and more comprehensive credit risk assessments, opening up credit markets to traditionally excluded borrowers.
💰Efficient Monitoring and Use of Collateral
Big Techs bring efficiency to loan repayment monitoring, often requiring less reliance on tangible assets as collateral. They tap into non-traditional data sources within their ecosystems to address issues stemming from information imbalances.
Policy Concerns
While the BIS paper stops short of making specific policy recommendations, it shines a spotlight on core concerns that can be organized into three main policy buckets:
1. Competition and Market Power
- The paper expresses concerns about big tech companies potentially abusing their dominant positions in the market (anti-competition). This includes preventing the entry of competitors, increasing switching costs for consumers, and using their market power to promote their own financial products over those of third-party providers.
See: Policy Blind Spot: The Interdependencies of Big Tech and Their Foothold in Financial Services
- The market concentration of the digital payments market, as seen in examples from China and India, is a specific concern. When a small number of big tech firms dominate, it can reduce competition and limit consumer choice.
- Big tech firms, armed with massive amounts of data, could engage in price discrimination. They might use personalized pricing strategies, potentially extracting excessive profits from consumers based on their willingness to pay. This raises questions about fairness and consumer protection.
2. Data Privacy and Security
- The paper highlights the risks associated with big tech companies' access to extensive personal data. It underscores the importance of protecting consumer privacy, particularly when major health websites share individuals' financial data with big tech firms.
- There's a trade-off between data efficiency (allowing big techs to provide financial services) and consumer privacy. If firms underinvest in data security, it could lead to data breaches and other security issues, further compromising consumer trust.
3. Algorithmic Bias and Inclusion
- The paper points out the risk of big tech firms' algorithms developing biases. This could result in discriminatory practices, such as certain groups being unfairly excluded from insurance markets or facing discriminatory pricing.
See: Tap-to-Pay Transactions and Big Tech Dominance Is A Thorn for CFPB
- The persistent gender gap in fintech product usage is a concern. Technological advancements alone may not be enough to address this gap, and policymakers need to consider measures to promote gender equality in financial access.
In Conclusion
The BIS paper calls for policies and regulations that address competition and market power concerns, protect consumer data privacy and security, and mitigate algorithmic biases while striving for greater financial inclusion and gender equality in fintech services.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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