This column assesses the economic forces behind the adoption of Big Tech services in finance. It shows that Big Tech lenders thrive in countries with less competitive banks and less strict regulation, and that they have an information advantage from the use of big data and machine learning.
The main advantage of Big Tech firms is their ability to exploit their existing networks and the massive quantities of data generated by their existing business lines. Their entry raises a number of important questions. For instance, what are the economic forces that best explain the adoption of Big Tech services in finance? Do Big Tech lenders have an information advantage from their access to users’ data or from technological advantages arising from innovations in processing methods, particularly in relation to credit scoring?
FinTech firms extend less than 1% of global private sector credit, but their footprint is growing. In a number of countries in Asia, Latin America, Europe, and North America, Big Tech firms now lend to millions of small and medium firms.
Big Tech firms differ from banks in at least two key ways. First, they have a loyal client base in users of their e-commerce platforms, messaging services, or search engine. Second, they use advanced technology, for example artificial intelligence, to parse massive volumes of data. Big Tech lenders can exploit the data generated by their networks and machine learning to tailor prices and distribute financial services. Credit and other services are typically provided without human intervention.
The rapid growth of Big Tech in finance will bring both benefits and risks to the future banking system. Big Tech firms may enhance competition and financial inclusion and contribute to the efficiency of financial services. Conversely, such firms may further concentrate market power or give rise to new systemic risks (BIS 2019). Overall, it is important to understand how Big Tech firms fit within the current framework of financial regulation, and under which principles regulation should be organised.
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