Date published: Dec 2021
SUERF Policy Brief, No 250
by Frederic Boissay, Torsten Ehlers, Leonardo Gambacorta and Hyun Song Shin1
Bank for International Settlements
Download: SUERF Policy Brief, No 250 (0.54 MB)
The entry of large technology companies (big techs) into finance promises efficiency gains and greater financial inclusion. At the same time, it introduces new risks associated with market power and data privacy. The nature of the new trade-off between efficiency and privacy will depend on societal preferences and will vary across jurisdictions. This increases the need to coordinate policies both at the domestic and international level.
The business model of large technology companies (big techs) such as Alibaba, Amazon, Facebook, Google and Tencent rests on enabling direct interactions among a large number of users on digital platforms. An essential by-product is their large stock of user data, which they use to offer a wide range of services and exploit natural network effects, generating further user activity. Increased user activity completes the circle, as it generates yet more data. Building on the self-reinforcing nature of the data-network-activities (DNA) feedback loop, some big techs have ventured into financial services, including payments, money management, lending and insurance. Big techs’ foray into finance raises both opportunities and risks (Boissay et al, 2021).
Big techs’ business models can be best described as online platforms that allow different types of user to interact. Big techs initially create value as online “multi-sided platforms” (MSPs), by enabling and catalysing direct interactions between two or more groups of users (eg buyers and sellers). The three main types of online platforms are social networks, e-commerce platforms and search engines.
Financial services both benefit from and fuel the DNA feedback loop. Offering financial services can complement and reinforce big techs’ commercial activities. The typical example is payment services, which facilitate secure transactions on e-commerce platforms, or make it possible to send money to other users on social media platforms. Payment transactions also generate data detailing the network of links between fund senders and recipients. These data can be used both to enhance existing (eg targeted advertising) and other financial services, such as credit scoring.
Big techs may have a competitive advantage over banks and serve firms and households that would otherwise remain unbanked (Graph 1, right-hand panel).2 This is because they can tap different but relevant information from their digital platforms.3 For example, two large big techs in emerging markets, Ant Financial and Mercado Libre, claim that their credit quality assessment and lending decisions typically involve more than 1,000 data series per loan applicant. There is evidence that the advent of fintech and big tech lenders and their use of alternative data have been a boon for borrowers who are unserved or underserved by banks. In China, for example, the major platforms have provided access to credit for hundreds of millions of new personal and business borrowers. Globally, big tech credit exceeded $500 billion in 2020 (Cornelli et al (2020)).
The sheer amount of data collected by big techs and their intelligent use have the potential to reduce financial frictions, in particular borrower screening, monitoring and collateral requirements. Frost et al (2019) suggest that, when applied to small vendors, big techs’ credit scoring outperforms models based on credit bureau ratings and traditional borrower characteristics. MYbank (Ant Financial group) uses network analysis of transactions to evaluate whether an entrepreneur separates personal funds from business funds, which is one of the basic principles of good business conduct.
Big techs can also ease collateral and documentation requirements that many smaller borrowers may not be able to fulfil, as anecdotal evidence from Argentina and China suggests.
The very features that bring benefits also have the potential to generate new risks and costs associated with market power. Platforms can exploit their market power and network externalities to increase user switching costs, exclude potential competitors, and consolidate their position by raising barriers to entry.
Platforms now often serve as essential selling infrastructures for financial services providers, while at the same time big techs compete with these same providers. When a network operator owns a smartphone-based payment system, for example, it can undermine competitors’ access to its own digital platform by charging competitors (ie banks or rival big techs) high fees to connect with its (payment) system. Once a captive ecosystem is established, potential competitors may face steep costs and high risks in setting up rival platforms.
Another major risk is the monopolistic use of data. One special aspect of data as an input of production is non-rivalry: data can be used many times over, and by any number of firms simultaneously, without being depleted. Thanks to non-rivalry, data generate increasing returns in both scale and scope (Farboodi et al (2019)).
Digital monopolies’ use of individual data can also entail discriminations among their customers. One example is price discrimination: data may help not only to assess a potential borrower’s creditworthiness, but also to identify and charge the highest rate this borrower would be willing to pay for a loan (ie their individual “reservation price”). Another example is unintended unethical discrimination. Over time, the algorithms used to process data may develop biases (eg based on race or religion) leading to greater inequality (O’Neil (2016)). One study of the US mortgage market, for instance, finds that Black and Hispanic borrowers are less likely to benefit from lower interest rates from machine learning-based credit scoring models than White or Asian borrowers (Fuster et al (2019)).
When information is gathered without the informed consent of the consumer, it often infringes on personal privacy. Popular health websites have been found to share people’s sensitive data (eg medical symptoms, diagnoses, drug names) with dozens of companies around the world, including big tech firms such as Google, Amazon, and Facebook (Financial Times (2019)). These risks are still greater when firms underinvest in data security, leading to data breaches (Carrière-Swallow and Haksar (2019)).
The benefits and costs of the use of personal data in finance raises important policy questions. These go beyond the traditional ones of financial stability and competition, extending also to a new trade-off between data efficiency and privacy.4
One challenge is related to assigning the control and ownership of personal data. Control and ownership of data are rarely clearly defined. In many countries, the default outcome is that financial institutions or big techs acquire customer data at very low cost and keep de facto control.
Another challenge relates to the value of privacy, and whether privacy should be traded off against other goals in the first place. Some argue that data privacy has the attributes of a fundamental right, which cannot be traded off against economic benefits.5 Evidence suggests that cultural preferences towards data privacy differ across jurisdictions, and even between different social segments (Chen et al (2021)).
There are at least three, potentially complementary, approaches to address the efficiency-privacy trade-off raised by the widespread use of personal data: i) restricting the processing of user data; ii) giving consumers greater control over their personal data; and iii) providing a set of public infrastructures on which a layer of services can be built.
In several jurisdictions, data protection laws have clarified data collection and use to protect personally identifiable information (eg in Brazil, California, the European Union (EU), Japan and Singapore). The challenge with these laws is how to balance differences in privacy concerns and use of data. Some jurisdictions have taken measures with a wider ambit that may restrict data flows across borders.6 While this supports law enforcement and monitoring and supervision, such frictions in the use of data could lead to cost inefficiencies, limiting their potential benefits.7
Open banking initiatives (eg in Australia, the EU and Mexico) are examples of concrete policy actions to give consumers greater control of their data. Open banking rules selectively restrict the range of data that can be transmitted (eg financial transaction data), as well as the type of institutions among which such data can be shared (eg accredited deposit-taking institutions).
Public infrastructures on which a layer of services can be built include foundations for digital services such as digital identity (Aadhaar in India or MyInfo in Singapore) and the development of data management protocols. Once these infrastructures are in place, payments, digital government services and a host of other solutions become possible.
How to define and regulate the use of data are issues that need to be coordinated at both the domestic and international level.
At the domestic level, central banks and financial regulators may need to upgrade their understanding of personal data issues. And they need to coordinate with competition and data protection authorities. There also is scope to address the policy challenges of big techs by developing specific entity-based rules (Carstens et al (2021), Crisanto et al (2021)). Elements of such an approach are already taking root in several key jurisdictions – notably in China, the EU and the United States.
At the international level, regulations on the use of personal data diverge widely. In the EU, the General Data Protection Regulation (GDPR) assigns data rights to individuals. In the United States, a patchwork of sector-specific legislation means that, in practice, companies have relatively free access to data. Meanwhile, only a few countries have a national data or artificial intelligence strategy.8 As the digital economy expands across borders, there is a need for international cooperation on rules and standards.
Aaronson, S A, “What are we talking about when we talk about digital protectionism?”, World Trade Review, vol 18, no 4, October 2019.
Bank for International Settlements (BIS), “Big tech in finance: opportunities and risks”, Annual Economic Report 2019, Chapter III, June 2019.
Boissay F., T Ehlers, L Gambacorta and HS Shin, “Big techs in finance: on the new nexus between data privacy and competition”, BIS Working Paper Series, no 970, October 2021.
Carrière-Swallow, Y and V Haksar, “The economics and implications of data: an integrated perspective”, IMF Departmental Papers, vol 19, no 16, 2019.
Carstens, A, S Claessens, F Restoy and H S Shin, “Regulating big techs in finance”, BIS Bulletin, No 45, 2021.
Chen S, S Doerr, J Frost, L Gambacorta and H S Shin, “The fintech gender gap”, BIS Working Papers, no 931, March 2021.
Cornelli, G, J Frost, L Gambacorta, R Rau, R Wardrop and T Ziegler, "Fintech and big tech credit: a new database", BIS Working Paper Series, no 887, September 2020.
Crisanto J C, Ehrentraud J, Lawson A and F Restoy, “Big tech regulation: what is going on?”, FSI Insights on policy implementation, no 36, September 2021.
Croxson, K, J Frost, L Gambacorta and T Valletti (2021), “Platform-based business models and financial inclusion”, BIS Working Paper Series, forthcoming.
Cyberspace Administration of China, “Security Assessment of Cross-border Transfer of Personal Information”, June 2019.
Farboodi, M, R Mihet, T Philippon and L Veldkamp, “Big data and firm dynamics”, NBER Working Papers, no 25515, January 2019.
Financial Times, “How top health websites are sharing sensitive data with advertisers”, 13 November 2019, www.ft.com/content/0fbf4d8e-022b-11ea-be59-e49b2a136b8d.
Frost, J, L Gambacorta, Y Huang, H S Shin and P Zbinden, “BigTech and the changing structure of financial intermediation”, BIS Working Papers, no 779, April 2019.
Fuster, A, P Goldsmith-Pinkham, T Ramadorai and A Walther, “The effect of machine learning on credit markets”, VoxEU, 11 January 2019.
Hau, H, Y Huang, H Shan and Z Sheng, “Fintech credit, financial inclusion and entrepreneurial growth”, mimeo, 2018.
Huang, Y, C Lin, Z Sheng and L Wei, “Fintech credit and service quality”, mimeo, 2018.
Mitchell D and N Mishra, “Regulating cross-border data flows in a data-driven world: how WTO law can contribute”, Journal of International Economic Law, vol 22, no 3, September 2019.
Nguyen Trieu, H, “Why finance is becoming hyperscalable”, Disruptive Finance, 24 July 2017.
O’Neil, C, Weapons of math destruction: how big data increases inequality and threatens democracy, Broadway Books, 2016.
Petralia, K, T Philippon, T Rice and N Veron, “Banking Disrupted? Financial Intermediation in an Era of Transformational Technology”, Geneva Reports, no 22, 2019.
About the authors
Frederic Boissay is a principal economist at the Bank for International Settlements (BIS). He joined the BIS on 1 January 2016 from the Financial Research Division of the European Central Bank. He holds a PhD and a master’s degree in economics from the Paris School of Economics and an advanced degree in statistics and economics from the Paris Graduate School of Economics, Statistics, and Finance (ENSAE). He is interested in macro-financial matters, ranging from trade credit to the role of big tech firms in finance. His main research agenda consists in modelling and quantifying the adverse effects of financial crises on the macro-economy and studying how financial regulation and monetary policy may help avert crises.
Torsten Ehlers is a Senior Economist at the Bank for International Settlements. He joined the BIS as an Economist in September 2011, after earning his PhD from the University of Zurich. During his studies he conducted research projects both at the Bank of England and the Bundesbank. Prior to his PhD, he obtained a Masters in Economics from Warwick University, United Kingdom, and a Masters in Business Administration from the University of Dortmund, Germany. From 2013 to 2016 he worked in the BIS representative office in Hong Kong SAR. His research interests cover international banking, derivatives markets, shadow banking and sustainable finance. Torsten Ehlers is currently on a secondment to the International Monetary Fund.
Leonardo Gambacorta is the Head of the Innovation and the Digital Economy unit at the Bank for International Settlements. His main interests include the monetary transmission mechanisms, the effectiveness of macroprudential policies on systemic risk, and the effects of technological innovation on financial intermediation.
Hyun Song Shin is the Economic Adviser and Head of Research at the Bank for International Settlements (BIS). As the BIS Economic Adviser, Mr Shin co-leads the Monetary and Economic Department and is part of the Bank’s senior management as a member of its Executive Committee. Mr Shin has a background in academia. Before he took up his current position in May 2014, he was the Hughes-Rogers Professor of Economics at Princeton University, having previously held appointments at Oxford University and the London School of Economics. He has been an intellectual leader in the fields of banking, international finance and monetary economics, topics on which he has published widely, both in leading academic and official publications. One area of recent focus has been in developing the BIS’s research programme on digital innovation and the financial system, including the design of central bank digital currencies and their implications for users, financial intermediaries and the central bank. Mr Shin was part of the BIS management team that developed the BIS Innovation Hub, and served as its Interim Head at its launch in 2019. Mr Shin is a Korean national. In 2010, while on leave from Princeton University, he served as Senior Adviser to the Korean president, taking a leading role in formulating financial stability policy in Korea and developing the agenda for the G20 during Korea’s presidency.
SUERF Policy Briefs (SPBs) serve to promote SUERF Members’ economic views and research findings as well as economic policy-oriented analyses. They address topical issues and propose solutions to current economic and financial challenges. SPBs serve to increase the international visibility of SUERF Members’ analyses and research. The views expressed are those of the author(s) and not necessarily those of the institution(s) with which the author(s) is/are affiliated.
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