The Reserve Bank of India (RBI)’s October Bulletin, on big techs’ entry into the banking and financial services domain, has generated interest in the media, with an inordinate focus on the ‘systemic risks’ that the big techs pose to financial stability. A similar concern was also highlighted in the RBI’s 25th Financial Stability Report, released in June.
Big techs refer to large technology companies such as Google’s parent company Alphabet, Apple, Meta (previously Facebook), Amazon, and several others, who each have hundreds of millions of active users across the world, and have in recent years laid out ambitious plans to roll out a variety of financial services — including payments, and money management.
Apple, for example, on October 13 announced its plan to launch a high-yield savings account in partnership with Goldman Sachs. Google and Meta (via WhatsApp) already offer payment services in India and other markets.
We do a great disservice to the debate over big techs’ plans for the financial services business if we focus exclusively on the risks involved, and disregard the opportunities they are likely to open up, and the plausible advantages they would bring.
For Big Techs acquiring licenses for banking or payments, their ability to create and market more personalised financial products by using technology and data at a humongous scale is one distinct competitive advantage. In addition, they have a ready and captive user base of hundreds of millions for their products, and services, even if there are obvious switching costs involved.
Yet, financial services are one domain where network effects — responsible for fuelling the rapid growth of these platforms — are difficult to attain. Unlike social or messaging networks where users’ benefits multiply when more of their friends are on the same network, banks demonstrate no such advantage.
Incumbent banks and financial institutions on the other hand have access to rich customer data, but they have struggled to put in place technology that can analyse and make sense of this data to create new and more personalised products and services. To overcome this limitation, they have often partnered with fintech startups or licensed their technologies. They also have the trust capital built over decades of serving their customers — something that the other two competitors lack.
Finally, fintech companies typically do not have data, consumer trust, or even a large and captive user base; factors that necessitate them to partner with incumbent financial institutions to bring their technology innovations to the market.
This understanding of the tripartite nature of the competition among big tech, fintech, and incumbent financial institutions enables us to better understand the primary risk of big techs’ entry into the space — erosion of market competition. Further, between big techs and incumbents, the battle essentially boils down to who can use technology and customer data better to offer a superior customer experience.
The RBI paper indeed counts erosion of competition as a key risk, but it also notes that regulators worldwide are adapting and adjusting their policy frameworks to cope. For example, to ensure that the big techs have no unfair advantage through their wealth of data acquired from multiple sources, the European Union and China have mandated ‘purpose specificity’, meaning that a user’s data can be collected and utilised only for the purpose that is consented by the user.
Further, the EU and China also mandate ‘data portability’, allowing a user to switch their service providers without losing historical data.
Difficulty in conducting effective oversight of big techs is cited as another risk, given their complex organisational and governance structures is cited as another risk. To counter it, The UK’s Financial Conduct Authority requires ‘unhindered supervisory outreach’ on the company seeking a license. Also, central banks are not the only regulators holding the market dominance of big techs to tighter scrutiny. India’s competition commission (CCI) recently imposed back-to-back fines on Google for indulging in what it termed as unfair business practices.
Regulators around the world (including in India) have already taken or are contemplating a variety of steps and policy measures to contain and manage the risks arising from big techs’ linkages with the banking and financial services sector. This leaves us with the benefits and advantages accruing to both markets and end-customers from technology and product innovations brought forth by big techs.
The competition between big techs and fintechs on a well-regulated and level playing field is likely to not only lead to the emergence of revolutionary financial products and services that significantly enhance customer experience, but also reduce operational and transactional costs of servicing the unbanked, thereby leading to greater financial inclusion — advantages that fintechs have already demonstrated.
These are still early days yet and we are yet to see the full potential of big techs in rewiring the financial services business models; but if we can rely on regulators performing their job well, a cautious optimism might be a better approach over unbridled scepticism over their entering the financial services domain.Ankit Ratan is cofounder and CEO, Signzy. Views are personal, and do not represent the stand of this publication.