RBI flags growing presence of Big techs a challenge to banks

RBI | [Image: Shutterstock]

The Reserve Bank of India (RBI) flagged concerns around Big tech entering the digital financial services saying that important policy issues may arise.

"Specifically, concerns have intensified around a level playing field with banks, operational risk, too-big-to fail issues, challenges for antitrust rules, cyber security and data privacy," RBI said in its biannual Financial Stability Report.

Big techs usually refer to the five biggest Information Technology companies in the world - Google, Amazon, Facebook, Apple and Microsoft.

While it acknowledged that Big techs offer a wide range of digital financial services and have a substantial footprint in the payment systems, crowdfunding, asset management, banking and insurance of several advanced and emerging market economies, the central bank flagged three unique challenges that these Big techs present.

First, they straddle many different (non-financial) lines of business with sometimes opaque overarching governance structures. Second, they have the potential to become dominant players in financial services and third, big techs are generally able to overcome limits to scale in financial services provision by exploiting network effects, RBI noted.

As a resolution, RBI said that blending activity and entity-based prudential regulation of big techs may be applied adding that an activity-based approach is already applied in areas such as anti-money laundering [AML] /combating the financing of terrorism [CFT]; an activity-based approach is the provision of cloud services, where minimising operational and in particular, cyber risk is paramount.

UPI payments are currently dominated by Walmart-owned PhonePe, which has a market share of over 40 percent and Google Pay which has 37-38 percent. The other key players include Paytm, Amazon Pay and WhatsApp Pay, which launched a few months ago.

The National Payments Corporation of India (NPCI) had already introduced a volume cap for a Third-Party Application Provider or TPAP (payment apps like PhonePe, Google Pay, Amazon Pay etc) effective from January 1st, 2021. Existing TPAPs who exceed the volume cap as on 31st December 2020, will have a period of 2 years from the effective date to comply with the provisions. On the other hand, banks apps (Paytm, Axis etc) are exempted.