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20 November 2019

BIS: Welfare implications of digital financial innovation

Based on remarks by Mr Luiz Awazu Pereira da Silva, Deputy General Manager of the BIS, with Jon Frost and Leonardo Gambacorta, in which they talk about implications of innovations in payments, credit markets, savings and insurance. They then discuss broader economic implications of digital innovation and conclude with some thoughts on what public authorities, the private sector and societies can do to respond.

Authors consider what can be done to maximise the welfare benefits of these innovations and contain the negative effects. The punchline is that it will require cooperation. 

First, there is clearly a link between financial stability, competition policy and issues concerning the proper use of data in finance. Data are said to be the new “digital oil”, control over which provides a significant advantage. An environment with hazy data rights controlled by big corporations is no longer tenable. There are complex trade-offs between policy goals. Bringing together the public sector authorities responsible for these areas – ie financial regulators, competition authorities and data protection authorities – is an important first step, and work in this area is ongoing.

Second, for regulation, the basic rule should be: “same activity, same regulation”. For example, the KYC, anti-money laundering and cyber security rules for banks need to be extended to any banking activity conducted by big techs. Contestability needs to be measured by more sophisticated metrics than just “price” or “firm size”. Regulations need to lower entry costs, favour the availability of public technological infrastructures and promote the interoperability of applications. In a nutshell, the efforts of competition policies and regulation should promote a “race to the top” in the provision of digital financial services, where the network externalities benefit all.

Third, they see a strong role for the private sector to consider welfare implications in designing innovations. To take a long-term view on the impact of digital financial innovation is in the self-interest of these same firms. Indeed, if companies want to build on a foundation of societal trust, they need to make sure collectively that financial innovations are benefiting ordinary people and leading to outcomes that are socially Pareto-neutral or -improving, and are also perceived as such. Firms should at least aim for outcomes that can be made Pareto-compatible with the appropriate set of corrective policies.

They state: “Finally, for the hard societal questions of how resources should be distributed, and redistributed with tax policy and transfers, the responsibility is clearly with governments. These are political questions, and it is up to our political systems to answer them. Yet by providing research insights, we can help support an informed debate by citizens. Given that the technological revolution knows no borders, and that many firms – both banks and big techs – operate in markets around the world, there is a lot of value in having this discussion at an international level.”

Full speech on BIS

© BIS - Bank for International Settlements

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