Complex governance of 'bigtech' firms in financial services limits scope for effective oversight, says RBI paper

Regulators across the globe, including those in China, Europe and the US, have increased the scrutiny of the bigtechs and their business models in the financial domain.

The complex governance structure of 'bigtech' firms in the financial sector limits the scope for effective oversight and design of entity-based regulations, according to a paper authored by the Reserve Bank of India (RBI) staff.

“With the increasing complex inter-linkages between financial institutions and tech-companies, the regulatory frameworks need to keep up the pace with innovations to contain the vulnerabilities that may arise from the new risk propagation channels,” the paper titled “‘Bigtechs’ in the Financial Domain: Balancing Competition and Stability,” published in the monthly bulletin of the RBI, said.

The paper has been written by Vijay Singh Shekhawat, Avdhesh Kumar Shukla, ACV Subrahmanyam, and Abhishek Singh, all from the RBI's Department of Supervision. The views expressed in the article are those of the authors and do not represent the views of the RBI.

Apart from their complex structure, bigtechs can impact the risk and maturity transformation functions through their direct exposure to provision of financial services, the paper showed. At times this may also translate or lead to shadow banking activities, undermining financial stability, it said.

Also read: Entry of big fintech firms in financial services poses systemic risks, says RBI Governor

Further, bigtechs, given their pervasive adoption as third-party service providers, generally become the underlying platform on which a host of services are offered. This uniquely positions the bigtechs to easily acquire cross-functional databases which can be exploited for generating innovative product offerings, making them dominant players in the market, according to the paper.

RBI Governor Shaktikanta Das has been vocal about the systemic risks posed by the entry of bigtechs in financial services, including those pertaining to overleverage. At an event on June 17, Das had said that the large technology companies which have entered into the provision of financial services could potentially be another source of disruption to the financial system.

Regulators across the globe, including those in China, Europe and the US, have increased the scrutiny of the bigtechs and their business models in the financial domain and are adjusting the policy frameworks to cope with the risks presented by bigtechs.

Given the increasingly dominant role of bigtechs and fintechs in the financial ecosystem, the RBI has issued the draft guidelines on outsourcing Information Technology (IT) and Information Technology Enabled Services (ITeS) by the regulated entities, to ensure effective management of attendant risks in outsourcing of IT activities.

According to the RBI paper, although bigtechs bring with them benefits of greater financial inclusion, efficient operations and lower transaction costs, they also pose the risk of stifling competition, operational resilience issues and financial stability.

The key paradigmatic shift in the regulatory approach towards addressing risks from bigtechs lies in calibrating the regulatory frameworks with a mix of entity and activity-based rules, the paper findings showed. The requirements for creating holding companies involved in financial activities, the activity-specific licences, requirements on data protection, security, equal treatment of third-party applications, data portability among others augur well for limiting the risks posed by bigtechs, the paper showed.

Further, as the interaction of bigtechs with the financial sector evolves, close cooperation between competition (anti-trust), data, governance and financial authorities are called for to design or update regulations to protect competition and promote financial stability, according to the paper.

On a larger scale, as bigtechs operate across jurisdictions, there is already a compelling case to seek international consistency of policy developments, it said. Exact calibrations on both entity and activity-based approaches will need to be further explored and tailored to country-specific conditions to ensure that regulators’ concerns be addressed without stifling financial innovations, it added.