The rising importance of BigTechs in the financial sector may lead to radical changes in the financial landscape. While BigTechs are boosting innovation and driving efficiency in financial services, their increasing prominence may also lead to concentration risk. This requires a review of regulations and supervisory strategies, according to DNB's latest report, “Changing landscape, changing supervision. Developments in the relationship between BigTechs and financial institutions".
In Asia, most notably in China, BigTechs such as the Ant Group and Tencent have become key players in the financial sector, offering mobile payments, credit, wealth management and insurance services. They are providing new platforms for financial services. US-based BigTechs such as Amazon, Apple, Google and Facebook are also increasingly offering financial services, often in partnership with financial institutions. In the Netherlands and elsewhere in Europe, cooperation between BigTechs and financial institutions is mainly focused on improving digital convenience of payment services , while credit provision services are limited. At global level, financial institutions are increasingly purchasing cloud services from BigTechs.
Financial services are relevant for BigTechs, because new services allow them to strengthen their platforms. By using the data that become available from the use of financial services, they can improve their services, attract yet more users and increase their revenues. Joining forces with financial institutions also allows BigTechs to offer financial services without becoming subject to financial supervision themselves, while at the same time benefiting from consumers’ higher levels of confidence in banks and insurers. Cooperation is also attractive to financial institutions, since BigTechs can support them in providing more digital convenience to their customers, and cooperation can also increase their market shares.
Furthermore, cooperation in the cloud can help financial institutions enhance their innovative power, flexibility and efficiency.
Technological developments are increasingly penetrating the financial services sector, and service providers are responding to the needs of a digitalising society. In the past year, the pace of digitalisation accelerated due to governments’ social distancing measures to combat the COVID-19 pandemic. Consumers and firms are increasingly using online platforms to purchase products and services, including financial services. As platforms are used increasingly frequently, market concentration levels in financial services are rising. European rules and regulations are being developed to manage the associated concentration risks in the areas of data privacy and data sovereignty, security and operational resilience. Potential misuse of market power by platforms is another point of attention.
The financial market of the future also depends on the development of relations between BigTechs, banks and insurers. Two decisive factors in this respect are BigTechs’ strategic choices regarding their role in cooperation and financial institutions’ innovative power. Will the role of BigTechs continue to be limited to facilitating technological and innovative developments, or will they take over control of customer relationships as key distribution channels for financial services? Will financial institutions be able to continue to keep up with the pace of innovation as they were able to do in the past? The report sets out four possible scenarios for the future. If banks and insurers are able to harness sufficient innovative power and BigTechs focus on providing cloud services, financial institutions may be able to shape innovation in financial services, based on their own financial platforms (Innovative finance). If financial institutions are unable to harness their innovative power, they may become dependent on the BigTechs, that will distribute financial services of banks and insurers of their choice from their own broad platforms. In selecting these financial institutions, BigTechs will use their dominant position in negotiating agreements about turnover, prices and services (BigTech in charge). Innovative financial institutions may also create their own platforms, and compete for customers with vertically integrated BigTechs that have broad platforms (In competition). The fourth scenario sketches a market with low dynamics due to lack of innovative power on the part of financial institutions and lack of interest for financial services on the part of BigTechs (Traditional finance).
Figure 1 Scenarios that depend on the innovative power of financial institutions and Big Techs' strategies in respect of partnerships
The developments outlined above have the following three implications for policy and supervision:
Financial institutions must be challenged on the sustainability of their business models
The scenario analysis in the report shows that the rise of BigTechs may have profound consequences for the business models and strategies of financial institutions. Based on the scenarios, we will seriously challenge institutions on their strategies and the sustainability of their business models in view of the ongoing digitalisation of financial services. Whether institutions opt for a platform strategy or for a specific niche, they must be prepared to bolster capacity in terms of technologies and organisation.
Regulations must be adjusted to address new risks
While network effects are stimulating growth and concentration of activities at BigTech platforms, the regulatory frameworks are not yet adapted to respond to the consequences for the financial markets in a structural way. The rise of BigTechs in the financial sector may cause concentration risks in the areas of financial services, the distribution of financial products and services and access to consumer data. The relevant regulatory frameworks need to be adjusted to address these risks. In the longer term, the continuity and resolvability of systemically important BigTechs and distribution platforms may also demand attention.
Towards European supervision and cooperation between supervisory authorities
BigTechs are cross-border operators. As the role of BigTechs in the financial sector is steadily increasing, financial supervision of these parties at the European level is essential. In addition, an increasingly platform-based financial sector and economy require closer cooperation between supervisory authorities. Individual supervisory authorities with mandates in the areas of cybersecurity, data protection, competition and financial supervision should intensify their cooperation to enable more comprehensive supervision. Effective cloud supervision requires aligning regulatory frameworks at the European level to prevent overlapping or conflicting rules in national and European regulations.
More information in our DNB Press release
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