Big techs in finance: on the new nexus between data privacy and competition

Summary

Focus

Large technology companies such as Alibaba, Amazon, Facebook, Google and Tencent have started to provide financial services. The activities of big techs in finance are a special case of broader fintech innovation. While fintech companies are set up to operate primarily in financial services, big tech firms offer financial services as part of a much wider set of activities. Big techs' foray into finance raises both opportunities and risks.

Contribution

The contribution of this paper is threefold. First, it describes big techs' business models and analyses the potential benefits in their provision of financial services such as financial inclusion and reduced asymmetric information problems in the supply of credit. Second, it evaluates the potential costs, including the new risks of price discrimination, abuse of market power, anti-competitive behaviour and limits to data privacy. Third, it lays out the complex public policy trade-off between the objectives of efficiency and privacy, and discusses the policy options

Findings

Big techs' entry in finance builds on their established digital platforms in e-commerce, search and social media, and holds the prospect of efficiency gains and greater financial inclusion. Their business model rests on enabling direct interactions among a large number of users. An essential by-product of their business is their large stock of user data, which are used as an input for a range of services that exploit natural network effects, generating further user activity. Increased user activity then completes the circle, as it generates yet more data. The self-reinforcing loop between data, network externalities and activities, is the DNA of big techs. Big techs have the potential to become dominant through the advantages afforded by the data-network-activities DNA loop – raising competition and data privacy issues.How to define and regulate the use of data has become an important policy issue for authorities and increases the need to coordinate policies at both the domestic and international level.

Abstract

The business model of big techs rests on enabling direct interactions among a large number of users on digital platforms, such as in e-commerce, search and social media. An essential by-product is their large stock of user data, which they use to offer a wide range of services and exploit natural network effects, generating further user activity. Increased user activity completes the circle, as it generates yet more data. Building on the self-reinforcing nature of the data- network-activities loop, some big techs have ventured into financial services, including payments, money management, insurance and lending. The entry of big techs into finance promises efficiency gains and greater   financial inclusion. At the same time, it introduces new risks associated with market power and data privacy. The nature of the new trade-off between efficiency and privacy will depend on societal preferences, and will vary across jurisdictions. This increases the need to coordinate policies both at the domestic and international level.

Keywords: digital platforms, big techs, finance, data privacy, competition.

JEL classification: E51, G23, O31.