SINGAPORE (July 1): Big technology companies have upended industries ranging from music to retailing. What will be their disruptive impact on financial services? That is the latest conundrum keeping bank regulators awake at night. Innovations such as Facebook’s new global digital currency, Libra, demand a joined-up response. That will be hard to agree.
Technology firms have been burrowing into parts of the banking industry for years. In some countries, the insurgency is all but complete. Alipay, the payments service spawned by Chinese e-commerce giant Alibaba Group Holding, claims a billion users. Big technology companies earned 11% of their combined revenue from financial services last year, according to the Bank for International Settlements (BIS). Though the largest chunk of that came from Asia, upstarts are making inroads in the West.
The onslaught presents regulators with a four-dimensional challenge. For starters, digital technology enables new products that do not fit neatly into standard financial categories. Take Libra. Facebook says the currency will be a stable digital token backed by assets in a range of currencies — though users will not receive the interest on those assets. Some regulators may view this as akin to a bank deposit. Others could conclude it is more like an investment in a fund. The picture might become clearer as Facebook explains how ordinary users will acquire and use Libra. The danger, however, is that it is treated differently between countries, allowing the fledgling product to wriggle through gaps in existing rules.
The second worry is that the revolutionaries undermine the existing system. Technology is good at exposing and attacking previously hidden costs. British upstart TransferWise, which offers cheap cross-border payments, is already making life harder for UK lenders, which charge fees of up to 3% on foreign currency transactions. Bank executives are braced for a similar onslaught in mortgages, where lenders tend to charge their existing customers higher interest rates than they offer to new borrowers.
Ironing out these inefficiencies is good for consumers. But it will also unpick the complex cross-subsidies that have evolved in banking. Less profitable lenders are more vulnerable to economic shocks and prone to taking on risks. A squeeze on their most lucrative businesses will also make it harder to keep up with innovation. UBS analysts estimate that a group of 49 big banks last year invested a combined US$18 billion in technology. Google owner Alphabet and Amazon.com each spent more than that on R&D.
Meanwhile, new companies can quickly become systemic. Alibaba affiliate Ant Financial accounted for almost a third of all new securitisations issued in China in 2017, the BIS reckons. Yu’e Bao, the US$165 billion money-market fund managed by one of its subsidiaries, is so large that regulators fret about the effect on banks and markets if investors rushed to withdraw their funds. If Libra takes off, its asset reserve could quickly distort bank deposits and government bond markets around the world.
The third challenge is to decide whether big technology is good or bad for competition. Financial regulators have tended to welcome start-ups in banking because they increase choice, while simultaneously worrying about lower lending standards. But big technology firms can turn that logic upside down. BIS research suggests MercadoLibre, the Argentine e-commerce group, has better information about the creditworthiness of companies using its platform than local banks. That suggests the likes of Alphabet, Amazon and Facebook could use their existing troves of data to make less risky loans.
Yet, if these giants pick off the most profitable borrowers or insurance buyers, they could end up extending their already hefty grip on users’ lives. European Union rules requiring banks to share their customers’ financial data with new entrants — which were designed to stimulate competition — might then end up entrenching an already powerful oligopoly.
Admittedly, that dilemma is less sharp in developing markets, where most people have a mobile phone but fewer have access to conventional banks. But it also points to a fourth problem for watchdogs: the challenge of agreeing to a consistent approach. Bank regulators have done a fairly good job of maintaining a level playing field, through forums such as the Financial Stability Board, yet enforcement in areas like money laundering remains patchy. New cross-border services such as Libra could expose big gaps in the regime.
Financial regulators will also quickly overlap with — or clash with — competition watchdogs and data protection authorities that are taking a more muscular approach to big technology companies. And as those companies are almost all American or Chinese, geopolitical tensions are bound to intrude on attempts to take a consistent approach.
The good news is that regulators are aware of all these issues. And they are determined not to make the same mistake as media regulators, which are still trying to design and impose rules on Facebook and other social media platforms long after they achieved massive scale. Nevertheless, many sleepless nights await.
