Major tech companies—also known as BigTech—are attracting regulatory attention these days.
Companies like Google, Amazon, and Microsoft are branching out from their established niches into different verticals, ranging from finance to physical goods. This expansion is facilitated by either acquiring established businesses, for example, Amazon’s acquisition of Whole Foods—or developing new platforms to provide a specific service, like Google Pay.
While initial forays into the finance industry have just begun, we can expect industry giants to ramp up their expansion in the next few years. Apps, like Apple Pay, are only the starting point, and BigTech firms certainly have plans for a more significant expansion into financial services.
This gradual expansion from BigTech into “traditional’ industries such as finance is one of the top regulatory compliance concerns in the finance industry. Today, there is already a precedent for this disruption through digital banks that are unburdened by legacy systems and free to operate with more agility.
We can expect a similar disruption from BigTech firms, either through digital technology or by acquiring firms already established in this industry.
Why should the rise of BigTech concern regulators?
Despite the relatively traditional role financial services played in BigTech business models in the past, we can expect a dramatic transformation in the coming years.
In addition to offering their own financial products, BigTech firms work with traditional finance firms by providing the technology older institutions need to power digital services, suggesting that these firms play a far more integral role in the industry than most would have anticipated.
BigTech’s unrestricted foray into the finance industry raises significant concerns about industry stability, competition, data privacy, and cybersecurity.
Here’s why.
New customer bases to facilitate rapid growth
BigTech firms have a massive advantage because of their brand recognition and large user base.
Using this advantage, these firms can sell financial services to a financial institution’s existing customers as a convenient extension, giving these firms the means to scale services rapidly and achieve scale in a way they wouldn’t have otherwise.
DNA loops to expand commercial activities
Modern financial services benefit from the DNA loop that is integral to the BigTech business model—data analytics, network externalities, and interwoven activities.
Financial services are fueled by these three elements, each benefiting from the other, creating a DNA feedback loop that fosters commercial activities and fuels their expansion.
Industry disruptions
BigTech’s expansion could redefine how the industry operates by using data obtained from financial institutions, potentially proving disruptive to standard industry activities and requirements.
Instead of asking borrowers to provide evidence of assets before providing a loan, for instance, BigTech could take advantage of the borrowers’ use of their digital services to assess creditworthiness and enforce loan repayments.
A monopoly on financial data
Given their scale and technology, it’s possible that BigTech firms could develop a monopoly on financial data by taking advantage of their existing customer bases and using their substantial resources to expand cloud infrastructure and acquire new sets of data.
This would give rise to data monopolies that exert a disproportionate influence on the industry.
With a dominant position in the finance industry, the tech monopolies could become gatekeepers and control who enters the market and the type of data they can access.
It also raises questions about how consumer data is collected and used.
In this unique environment, regulators should focus on protecting consumer rights and maintaining industry integrity while providing BigTech firms sufficient room and agility to expand.
How can regulators keep pace with these developments?
Regulating BigTech firms successfully requires a more comprehensive regulatory system and appropriate procedures that meet policy requirements.
With BigTech operating in different industries, focusing on their actions in the finance industry would be severely limiting, providing regulators with an incomplete view of activities from BigTech firms.
Monitoring activity by BigTech firms means enriching the regulatory management framework to incorporate different areas such as data privacy.
An expanded regulatory framework requires technology that supports your expanded regulatory framework. Today, RegTech solutions are integral to regulating BigTech firms through the evolving capabilities of AI, machine learning, and NLP.
RegTech platforms automate regulatory compliance processes such as horizon scanning and make the outcomes of these processes more predictable and reliable while turning compliance into a more agile process.
Regulating BigTech while ensuring greater innovation in the industry
As BigTech begins to expand into finance, it falls to regulators to ensure that these firms do not gain disproportionate influence on the industry.
In exerting control over their activities, however, it’s important to avoid stifling innovation and ingenuity. Through creative policies and greater collaboration between key stakeholders, industry players and regulators may be able to achieve an optimal balance and all the right outcomes for the global economy.
