Opinion

Banking, FinTech, Big Tech: Emerging challenges for financial policymakers

FinTech and Big Tech firms are both increasingly stepping on banks’ traditional turf. This column introduces the 22nd Geneva Report on the World Economy, which looks at the challenges generated by new technology-enabled entrants to the global banking industry and the public authorities that oversee it. It argues that to respond adequately to the FinTech/Big Tech challenge, authorities will need to raise their game and enter uncharted territories.

By: , , and Date: September 26, 2019 Topic: Banking and capital markets

This article was also published on VoxEU

FinTech (financial technology) firms, generally start-ups that offer a specifically targeted financial service, and Big Techs, globally active technology firms with a relative advantage in digital technology that may add financial services to their range of offerings, are both increasingly – though differentially – stepping on banks’ traditional turf. Currently, financial services are only a small part of Big Tech’s global business. However, given their size and customer reach, Big Techs’ entry into finance has the potential to spark rapid change in the industry. They may even become dominant through their collection of valuable data and their large, established networks (BIS 2019). This has potential wide-spread implications, such as for monetary policy transmission and financial stability (Cœuré 2019), and even the political economy of central banking as we know it (Tucker 2017). The 22nd Geneva Report on the World Economy focuses on the challenges generated by new technology-enabled entrants to the global banking industry and the public authorities that oversee it (Petralia et al. 2019).

Banks have been challenged on their established turf before. In the 19th and 20th centuries, various types of cooperative banks and credit unions grew outside of the traditional banking industry, before being mostly absorbed into the mainstream banking policy framework. More recently, mutual funds have competed with the bank’s deposit-taking function as a safe place to park money.

The disruption of banking services by FinTech and Big Tech offerings is still at too early a stage to know whether it is just as transformational as such past episodes have been, or something more radical. The speed at which they develop new services in line with customer preferences, their ability for hypergrowth and hopping across jurisdictional borders, and in the case of Big Tech, their potential for leveraging massive established networks of users are awe-inspiring.

Even so, some features of banking are remarkably stable. Banking assets remain overwhelmingly concentrated in only a handful of jurisdictions. Traditional banking activities still account for more than two-thirds of total revenues of financial institutions, although some of these activities are now performed by non-banks and profits margins are squeezed by the low rate environment. Banks remain dominant in lending and deposit-taking, even as payments is an increasingly contested space.

While technology and market forces are central to the ongoing disruption, however, they will not be the only or even the main driver of outcomes. Banking is ultimately about money, and money is about public authority – this is why, for centuries, banks have been licensed when they weren’t direct creations of the state. Governments and central banks may be challenged by tech-enabled new entrants, but will not be sidelined by them. The globally coordinated reaction of financial authorities to the Facebook-sponsored Libra initiative demonstrates the point.

But to respond adequately to the FinTech/Big Tech challenge, authorities will also need to raise their game and enter uncharted territories. We identify three main dimensions to the effort, which are relevant to all jurisdictions even as they take highly diverse forms in different places.

  • Financial stability, which refers to the policies that protect the soundness of the financial system and, by implication, of the monetary system itself, is critical to any sustainable retail banking innovation. It is still unclear how new technologies may generate (or indeed mitigate) financial crisis scenarios, but the massive speed and scale associated with them will open new areas for vigilance if not outright regulation.
  • Competition is the aim to promote market success, development and efficiency in markets. Recent EU enforcement actions and ongoing debates in the US illustrate how Big Tech will increasingly force fundamental changes in the framework for competition policy, not to mention cross-border security concerns. Competition policy has often been only selectively applied to the banking sector, but the interaction with tech firms is likely to prompt a rethink.
  • Data rights. Banks have traditionally branded themselves as paragons of discretion about their clients’ operations, but the very notions of data privacy, data ownership, and data value are evolving at a rapid pace. While recent events have brought data privacy and protection to the forefront of policy discussion, the world is still far from global agreement on the most appropriate market or societal mix of data rights and access with respect to financial services policy. The EU General Data Protection Regulation (GDPR) is only a harbinger of public debates and legislation to come on how to protect individuals and legal entities from new risks inherent to the data economy.

For public authorities such as central banks and supervisors, the associated challenges we identify are at least three-fold.

  • First, they must keep pace with technological change – understand it, embrace it in their own organisations, and correspondingly adapt their skillsets and mindsets. Authorities may be faced with the difficult balance between a culture of prudence and attention to detail, which is often essential to delivering on their mandate, and the ability to adapt their frameworks rapidly to a fast-moving environment.
  • Second, they will increasingly have to work collaboratively with their peers across the globe as well as with non-financial peers in areas such as competition and data rights, in order to adequately respond to increased salience of Big Tech in the financial system. Alongside their peers, financial authorities will have to define new modes of cross-border coordination and, in some cases, possibly pooling of their mandates when these cannot be effectively fulfilled at the level of each individual jurisdiction. Perhaps more challenging, financial authorities will have to find ways to work with authorities with whom they may have had little or no interaction, or with entities which simply did not exist previously.  The experience of the last two decades in the EU, where financial authorities have had to gradually accept and internalise the growing role of the European Commission’s state aid control, may give a taste of more frictions and adjustments to come.
  • Third, they may increasingly need to consider institutional experimentation to remain able to oversee firms that evolve fast and hop jurisdictional borders. These could include forms of direct supervision that encompass several (if not necessarily all) jurisdictions at once, based on binding legal arrangements beyond the ‘soft law’ or voluntary cooperation that prevails in existing international financial bodies. Here too, the recent EU experience, where supranational supervision has become a reality even though it had long been considered utopian, may provide useful pointers for future initiatives.

All the same, banking sector policy, like digital services, will certainly stop short of complete global uniformity. The terms of debates on financial stability, competition, and data rights, will not converge in the foreseeable future across jurisdictions such as China, Japan, the EU and the US. International initiatives should aim at finding the right balance, preventing unnecessary fragmentation while adapting their tools to the diversity of collective preferences and political systems.

 

References


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More by this author
 

Blog Post

Inclusive growth

Making antitrust work for, not against, gig workers and the self-employed

Policymakers should act to deal with labour-market concentration trends that potentially harm workers, especially gig workers and the self-employed.

By: Georgios Petropoulos Topic: Digital economy and innovation, Inclusive growth Date: October 11, 2021
Read about event More on this topic
 

Past Event

Past Event

What is the link between biodiversity loss and financial instability?

Biodiversity loss impacts financial stability. How big is the risk of biodiversity loss for financial institutions?

Speakers: Sylvie Goulard, Romain Svartzman, Guntram B. Wolff and Michael Wilkins Topic: Banking and capital markets Date: October 5, 2021
Read article More on this topic More by this author
 

Opinion

El Salvador’s great crypto experiment

Can bitcoin surpass the dollar in popularity and make El Salvador the first state to operate entirely with a private currency?

By: Maria Demertzis Topic: Banking and capital markets Date: September 14, 2021
Read about event More on this topic
 

Past Event

Past Event

Academic lecture: International technology competition

Bruegel Annual Meetings, Day 3 - On the final day of the Annual Meetings, our Director Guntram Wolf sits with Keyu Jin to discuss international competition policy.

Speakers: Keyu Jin, J. Scott Marcus and Guntram B. Wolff Topic: Digital economy and innovation Location: Palais des Académies, Rue Ducale 1, Brussels Date: September 3, 2021
Read article Download PDF More on this topic
 

Working Paper

Stability of collusion and quality differentiation: a Nash bargaining approach

How do incentives to collude depend on how asymmetric firms are? For low levels of differentiation, an increase in quality difference makes collusion less stable. The opposite holds for high levels of differentiation.

By: Thanos Athanasopoulos, Burak Dindaroglu and Georgios Petropoulos Topic: Digital economy and innovation Date: June 15, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

New kid in the playground: China's antitrust push

How is China’s antitrust push being weaponised to counter western sanctions?

By: The Sound of Economics Topic: Global economy and trade Date: May 12, 2021
Read article More on this topic More by this author
 

Opinion

Crypto… mania

Cryptocurrencies are here to stay but are unlikely to be considered a credible alternative to money anytime soon.

By: Maria Demertzis Topic: Banking and capital markets Date: May 11, 2021
Read article Download PDF More on this topic More by this author
 

Working Paper

Research and innovation policies and productivity growth

Can research and innovation policies power growth? The answer currently can only be a timid yes. Too little is known of what drives the actual effects of R&I policies.

By: Reinhilde Veugelers Topic: Digital economy and innovation Date: May 10, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Money, money, money!

The nature of money is under scrutiny as central banks begin pondering issuing digital currencies

By: The Sound of Economics Topic: Macroeconomic policy Date: April 30, 2021
Read article More by this author
 

Opinion

Central bank currencies going digital

Electronic cash might be the future, but it is still unclear what payment innovation it offers for the public, certainly in the euro area. And it is unlikely to fully replace the comfort the consumer feels in having money under the mattress.

By: Maria Demertzis Topic: Banking and capital markets, Global economy and trade Date: April 27, 2021
Read article More on this topic
 

Blog Post

The impact of COVID-19 on artificial intelligence in banking

COVID-19 has not dampened the appetite of European banks for machine learning and data science, but may in the short term have limited their artificial-intelligence investment capacity.

By: Julia Anderson, David Bholat, Mohammed Gharbawi and Oliver Thew Topic: Banking and capital markets Date: April 15, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A digital yuan?

China is moving towards a digital currency but there is a long way to go.

By: The Sound of Economics Topic: Global economy and trade Date: April 14, 2021
Load more posts