Big Techs in Finance: Benefits, Risks, and Policy Implications – A BIS Working Paper
The Bank for International Settlements (BIS) has published a working paper that explores the role of big technology firms (big techs) in the financial sector. Big techs are defined as large, globally active technology companies that provide digital platforms for a variety of services, including financial services. Examples of big techs include Amazon, Alibaba, Facebook, Google, and Tencent.
Benefits of Big Techs in Finance
Big techs can bring significant benefits to the financial sector by enhancing financial inclusion, improving efficiency and convenience, and fostering innovation. They can leverage their large customer base, data analytics, and cross-selling capabilities to offer low-cost and tailored financial products and services to underserved segments of the market. They can also complement or compete with traditional financial intermediaries by providing alternative platforms and channels for financial transactions.
Risks of Big Techs in Finance
Big techs pose potential risks to the financial sector by undermining competition, threatening financial stability, and compromising data privacy. They can exploit their network effects, data advantages, and cross-subsidization strategies to gain market power and create entry barriers for new entrants. They can also pose systemic risks to the financial system if they become too interconnected or too dominant in certain markets or activities.
Business Models of Big Techs
Big techs use their network effects, data advantages, and cross-subsidization strategies to enter and expand in the financial sector. They tend to focus on segments of the financial value chain that are less regulated or more profitable, such as payments, lending, insurance, and asset management.
Regulatory Frameworks of Big Techs
The regulatory frameworks and market structures of different jurisdictions affect big techs’ activities. The paper compares these frameworks across regions depending on the level of development, innovation, competition, and regulation of local financial markets.
Policy Implications of Big Techs
The paper suggests some policy challenges and recommendations for addressing the issues raised by big techs in finance by ensuring a level playing field between big techs and other financial service providers by applying consistent regulation based on “same activity same regulation” principle.
This BIS working paper provides valuable insights into how big technology firms are transforming finance by leveraging their digital platforms to offer innovative financial products and services to consumers worldwide while posing potential risks to financial stability.
In summary, big techs have brought significant benefits to the financial sector by enhancing financial inclusion, improving efficiency and convenience, fostering innovation while posing potential risks to financial stability by undermining competition, threatening data privacy.
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