Big techs in finance

BIS Working Papers  |  No 1129  | 
16 October 2023
by Sebastian Doerr, Jon Frost, Leonardo Gambacorta and Vatsala Shreeti
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Summary

Focus

Large technology companies, or big techs, are increasingly venturing into finance and transforming financial markets. Their activities in the financial sector have attained macroeconomic significance in several countries. Big techs owe their success to business models that generate a large stock of user data, which are then used to provide financial services. This paper focuses on the implications of the expanding footprint of big techs in finance.

Contribution

We explain the business model of big techs and highlight the data-network-activity feedback loop. Building on this framework, we discuss the opportunities and risks arising from big techs' provision of financial services. We also study the role of public policy in balancing these opportunities and risks. In particular, we shed light on the role of central banks, financial regulators as well as data protection and competition authorities in achieving public policy goals of ensuring financial stability, competition and data privacy.

Findings

Big techs' reliance on large networks, non-traditional data and machine learning can improve financial inclusion, for example, access to credit. At the same time, the business model of big techs can create new risks of market dominance, price discrimination, algorithmic discrimination and threats to consumer privacy. Big techs' activities in finance hence lead to complex trade-offs between public policy objectives and require more coordination between national and international authorities.

Abstract

The entry of big tech companies into the financial services sector can bring significant benefits in terms of efficiency and financial inclusion. Yet big techs can also quickly dominate markets, engage in discriminatory behaviour, and harm data privacy. This leads to the emergence of new trade-offs between policy goals such as financial stability, competition and privacy. Regulators, both domestically and internationally, are actively working to address these trade-offs. This paper provides an overview over the state of the literature and the policy debate.

JEL classification: E51, G23, O31

Keywords : big techs, financial inclusion, competition, financial stability, data privacy