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Big tech in finance: opportunities and risks
It is still early days for large technology companies or “big techs” in financial services, but given their size and customer reach, these have the potential to spark rapid change in the financial system. This edited speech provides an initial assessment of the benefits and costs, and lays out a number of questions that deserve more attention.

July 09, 2019 | Hyun Song Shin

The big techs were one of the topics during the recently-concluded Bank for International Settlement’s annual general meeting held in Basel, Switzerland. The discussion centred on their entry into financial services even with already established platforms in their respective businesses.

Big techs’ entry into finance introduces new elements into the risk-benefit equation. Some are old issues of financial stability and consumer protection in new settings, which can be addressed by adapting or expanding existing regulation. But there are also important new elements. Public policy towards big techs in finance needs to build on a more comprehensive approach that draws on financial regulation, competition policy and data privacy regulation.

The “DNA” of big techs’ business model

The business model of big techs rests on enabling direct interactions among a large number of users. An essential by-product of their business is the stock of user data. The data are then utilised as input to offer a range of services that exploit natural network effects, generating further user activity. Increased user activity then completes the circle, as it generates yet more data. We dub this the “data-network-activities” loop – or the “DNA” loop.

The DNA loop is self-reinforcing. More data generates stronger network effects, which elicit more activity, leading to yet more data. This means that big tech firms with an established platform have a running start when they venture into financial services.

The source of their competitive advantage depends on the nature of their existing platform. Big techs with e-commerce platforms collect data from the activity of sellers and buyers, and can combine them with financial and consumer habit information. These can be a valuable input into credit scoring models, especially for loans to small and medium-sized enterprises (SMEs) and consumer loans. Big techs with large social...

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Keywords: Big Techs, Consumer Protection, Financial Regulation, Data, Payment, Financial Services, Financial System