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20 November 2019

BIS: Welfare implications of digital financial innovation

Drawing on existing evidence, this contribution surveys the main mechanisms through which digital innovations in payments, credit, savings and insurance could impact on welfare.

In each of these areas, there may be important efficiency gains from digital technology applications, but we do not know how these gains will be shared. More generally, distributional effects may arise from changes in competition and market power, price discrimination and the "tech premium" in labour markets. Maximising the welfare benefits of these innovations for the whole of society will require cooperation between public authorities, a long-term view from the private sector, and societal decisions from governments.

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.

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.

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