June 25, 2019 — As big technology firms expand their services to include finance, it is poses new risks to consumers, competitors and financial systems.
With large customer bases, access to massive amounts of data and the ability to scale-up quickly, technology-service providers like Alibaba, Amazon, Apple, Facebook, Google, Groupon and Tencent are poised to change the financial-services industry, international analysts say.
A Ripe Opportunity for Growth
Currently earning just 11 percent of their revenues from their financial services, many tech firms are eyeing the field as a means to make big profits. New services include payments systems, digital money, money management, insurance and lending.
“Big techs have the potential to loom large very quickly as systemically relevant financial institutions,” according to a report released this week by the Bank for International Settlements (BIS). Tech giants could “spark rapid change in the industry.”
BIS analysts are calling on regulators need to pay closer attention and coordinate with one another on an international level.
Facebook Plans Virtual Currency
Facebook, for example, is planning to launch a global cryptocurrency within its messaging app. The new digital currency, called Libra, would be linked to a basket of global currencies, rather than a single currency. If successful and allowed by regulators, it could enable its 2.7 billion users to send money around the world as fast as they message one another now.
Libra intends to “reinvent money and transform the global economy,” according to its website unveiling its plans.
The new currency could “single-handedly propel cryptocurrencies into the mainstream,” according to a news report in the Financial Times. “The threat to the existing banks is severe,” New York University finance professor David Yermack told the FT.
An even larger threat, however, is that Libra might pose risks for governments and financial systems. It could interfere with central banks’ ability to regulate their financial systems and run their monetary policies.
The Good: Efficiency and Financial Inclusion
The benefit to the trend is that tech companies can provide financial services to people who might otherwise not have access to them, especially in emerging markets.
In China, for instance, Alipay users have access to a money-market fund called Yu’ebao. That fund grew to over $150 billion within five years.
A ‘Data-opoly’ on Consumers
The downside of the trend is that many of tech-based financial services fall outside regulatory perimeters. That poses unique risks for consumers.
“Given their scale and technology, big techs have the ability to collect massive amounts of data at near zero cost. This gives rise to ‘digital monopolies’ or ‘data-opolies.’ Once their dominant position in data is established, big techs can engage in price discrimination and extract rents,” the BIS report asserted.
Moreover, it gives tech firms a competitive advantage over traditional firms. For instance, traditional banks have to follow strict regulatory limits on the services they provide and their use of consumer data. They also have a higher marginal cost of adding new customers.
‘Captive’ Consumers
In contrast, most tech firms already have a large number of users. Tech firms can add new services to those existing customer with relatively low costs. Furthermore, the tech consumers may face a high cost of exiting, making them a “captive” consumer base.
“Given network effects and high switching costs, big techs could also enforce loan repayments by the simple threat of a downgrade or an exclusion from their ecosystem if in default,” according to the BIS report.
Competitive Advantage Once Established
It’s also noteworthy that big tech finance has the ability to dominate the market once it is established.
“Once a captive ecosystem is established, potential competitors have little scope to build rival platforms,” the BIS report said. “Dominant platforms can consolidate their position by raising entry barriers. They can exploit their market power and network externalities to increase user switching costs or exclude potential competitors.”
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