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Speech Klaas Knot - “Big tech and financials: a happy marriage?”
(c) @Marieke Bijster/DNB
At the BIS Conference on Regulating Big Tech, Klaas Knot said that regulators need to re-examine their regulatory framework to respond to big tech risks to financial stability and competition. He said that the involvement of big tech firms has led to financial services that are cheaper, more convenient, and more tailored to users’ needs. But there are also risks attached to big techs becoming dominant providers, such as market concentration, privacy and business models of existing financial institutions.
Date: 7 October 2021
Location: BIS Conference Regulating Big Tech
Speaker: Klaas Knot
Thank you Gillian – it is a pleasure to be here. Let me start by saying a few words about the FSB’s work and findings in this area.
So what are the key issues? The expansion of big tech into financial services is really a big development in the financial industry. And certainly also for the good. It has given rise to financial services that are cheaper, more convenient, and tailored to users’ needs. This offers opportunities to improve consumer welfare and support financial stability. Roberto [Campos Neto] and Alejandro [Díaz de León] already gave some good examples of this. Big tech can also bring benefits to financial institutions, by providing advanced technologies and infrastructures, or through forging partnerships.
But, as we showed in our 2019 FSB report, we also need to be careful. There are risks attached to big techs becoming dominant providers, both to financial stability and competition.
The events at the start of the week when we saw a global outage of Facebook and WhatsApp provide a clear example of these risks to the man on the street, but we can extend that to cloud services.
Financial institutions increasingly use cloud computing and data services across a range of functions. Cloud services can offer greater resilience and lower the fixed costs for new entrants in financial services, and indeed many sectors of the economy. Yet there are only three or four large cloud providers globally. If the services of any one of them suddenly stops –whether from a cyber-attack, insolvency or other reasons – then that could mean trouble for many financial institutions simultaneously.
The FSB looked at this problem already two years ago. At that time, we did not find immediate financial stability threats, but we did encourage national authorities to examine the adequacy of their existing rules and supervisory practices to make sure financial institutions are on top of the issue. In
Europe, the Digital Operational Resilience Act (DORA) is on its way, which will likely make large cloud providers subject to financial oversight. The FSB is now following up on that work, and will report its findings soon.
This is only one example, but there are several other questions regarding financial stability. For example, big techs have significant resources, wide networks and access to customer data. This means they may quickly achieve market dominance. What does this mean for competition? Are the business models of existing banks, insurers and other financial institutions, still viable? If not, how can they adjust? This is the topic of a recent scenario study we did at DNB.
Another fundamental question is how can we ensure that the financial system stays safe and sound, when its architecture and governance are no longer controlled by licensed and supervised entities? Does that mean that big tech needs to brought under supervision?
This is not a theoretical exercise. Big techs are already quite important in payments in many economies, and increasingly in credit, insurance and wealth management. In October 2020, the FSB published a report on big tech firms in finance in emerging market and developing economies. In these countries we see more rapid expansion than in advanced economies. This is because the existing financial service providers are often absent, there is a large market of people with limited access to existing financial services, and governments are more actively supporting innovation in these regions.
But also in advanced economies the pace has stepped up, mainly due to COVID. Current FSB research indicates that the big techs have increased their presence in financial services owing to the demands of lockdowns and remote working. The same is true of well-capitalised fintechs, and the more digitalised financial incumbents.
So what does that mean for financial regulators? Well, first of all, we need to keep our eye on the ball. This is a fast-moving space, which means research we did two years ago may be outdated. So we need to revisit our findings regularly to make sure we are capturing changes in real time.
Next, we as regulators need to re-examine our regulatory framework to respond to big tech risks to financial stability and competition. Many of the issues extent beyond our traditional financial sector knowledge. Therefore we need to reach out to stakeholders and to other supervisors as well, notably in the field of data protection, competition and cyber risks.
A final remark. Dialogue is a two-way street. It can help us to learn more about the newest developments and better understand the business models of big tech firms. At the same time, there are still laws that continue to apply - also to cool technology. As they become active in financial services, big techs have a big responsibility to keep the financial system safe and sound. Dialogue can also help big techs and other new financial service providers to better understand what financial stability is about, and why it is important to protect it.