A supervisory and regulatory perspective of Big Tech involvement in financial services

The ESAs (European Supervisory Authorities) recently conducted a survey with the aim of understanding the involvement of Big Tech (whose core products are non-financial) in offering financial services within the EU. The survey specifically examined prominent companies such as Amazon, Alibaba, Apple, Google, Tesla, and Uber. The findings unveiled an increasing presence, particularly in the domains of payments and e-money, with some level of engagement in insurance. Here, we delve into the regulatory and supervisory aspects associated with this trend.

What are the opportunities and risks associated with big tech companies offering financial services?

Big Tech companies have internal connections called intragroup dependencies, which come from shared technology, financial resources, structure, and strategies within the company group. This can create opportunities such as using common technology and infrastructure to offer better and more user-friendly services at potentially lower prices. Financially, they can use group resources for liquidity needs and investments. Shared governance and regulatory compliance teams can lead to better overall understanding and more efficient operations. Structural dependencies, like shared data, enable improved and expanded services based on customer preferences. Using customer data across the group can give Big Tech companies a competitive advantage by anticipating customer needs and offering personalized services, possibly enhancing financial inclusion for consumers.

The risks associated with Big Tech companies come from both their internal connections and their external partnerships.

One significant risk is the reliance on shared technology, which can lead to operational and cybersecurity issues. If there’s a successful cyber-attack resulting in data loss, it could harm the company’s reputation and lead to a loss of investor or consumer confidence, affecting various business lines, including financial services.

Governance sharing, while potentially beneficial, can also pose risks due to conflicts of interest or insufficient attention to relevant risks.

The mishandling of customer data is another concern. Big Tech companies hold vast amounts of personal data, and there’s a risk of abusing or misusing this data for financial gain, such as targeted advertising or credit scoring.

External dependencies, especially in partnerships with financial institutions, can create financial, operational, and reputational risks. For example, consumers might be unclear about whom they are ultimately contracting with in ‘white labelling’ partnerships (when one company buys its product from another company and rebrands it as their own), leading to challenges in case of complaints or redress.

There are also concerns about the potential threat to financial stability if Big Tech companies increase their direct provision of financial services, disrupting traditional institutions and potentially contributing to enhanced financial stability risks.

The supervisory and regulatory perspective

Regulatory authorities find it challenging to supervise these companies because most of their financial services fall under activity-based regulations without broader oversight frameworks. Authorities suggest better supervision of these internal connections, and if Big Tech companies expand their financial services, new powers may be needed to address risks.

Additionally, there are difficulties in coordinating with other authorities like competition and data protection authorities. Some authorities suggest establishing criteria to monitor the significance of Big Tech companies in financial services, considering factors like the types of services, the number of users, partnerships with EU financial institutions, and specific risk factors. One authority also suggests further analysis of the trend of white labelling, although this is not limited to Big Tech companies.

The current rules for regulating Big Tech companies in finance focus on specific financial activities they engage in. However, some regulatory authorities feel that this “bottom-up” approach doesn’t fully consider the combined risks that can come from the connections between different parts of these companies.

One approach to minimise risks from these connections involves creating specific rules for Big Tech companies, requiring them to group their financial activities under a financial holding company.

Several authorities also highlighted the importance of ensuring a level playing field. They noted that traditional banking and insurance groups have specific rules to follow, but Big Tech groups with different types of financial services are not subject to similar regulations. This lack of regulatory oversight might lead to uncovered risks and concerns about fairness among different players in the financial industry.

Conclusion

There is clear increasing involvement of Big Tech companies in the EU’s financial services sector, and this presents both opportunities and risks. The internal connections within these companies offer advantages like improved services and financial inclusion, but also pose risks such as cybersecurity issues and governance challenges.

From a regulatory standpoint, authorities face difficulties supervising these companies due to fragmented regulations. Suggestions include monitoring criteria for the significance of Big Tech’s financial role and adopting a more comprehensive approach, possibly through the creation of financial holding companies. Ensuring a level playing field is crucial to address regulatory gaps and fairness concerns as Big Tech reshapes the financial industry landscape.

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Further reading: ESAs recommend steps to enhance the monitoring of BigTechs’ financial services activities