Bank for International Settlements
Gatekeeping the gatekeepers: when big techs and fintechs own banks – benefits, risks and policy options

Benefits and risks of Big Tech and Fintech entry in Banking

The Financial Stability Institute, created by the Bank for International Settlements and the Basel Committee on Banking Supervision, released a paper assessing the benefits and risks of Big Tech and Fintech entry in the banking sector, providing recommendations to the authorities to establish some specific requirements that mitigate concerns that this kind of movements may raise and thus allow the potential benefits they bring to consumers.

  • Why Big Tech and Fintech have obtained banking licenses in various countries?: According to the report the main reasons are “access to low-cost deposits that complement their product offerings, the cost savings associated with eliminating the need for partner banks, the perceived trust and legitimacy that a banking license bestows and the possibility that investors may reward such firms through higher market valuations”.
  • Big Tech and Fintech entry in the banking sector pose benefits and risks:
    - Benefits
    : Mainly related to better outcomes for customers due to technological innovations in the provision of financial services and higher competition and the ability to accelerate financial inclusion targets.

    - Risks
    : They embody the same challenges that appear when commercial or industrial non-financial corporates (NFCs) seek to own banks but could be magnified in the case of Big Tech and diversified FinTech, due mainly to its extraordinary market power and ability to leverage network effects:

- Conflicts of interest: For example, excessive intra-group operation not at market conditions that may undermine the bank’s financial resilience.

- Concentration of power/anticompetitive behaviors, for example, when NFCs have an in-house bank, they can use their size, customer base and market power to erode competition in the banking sector, by subsidizing their banking activities (from their non-financial businesses) to gain market share.

- Contagion and systemic risk: Affiliations between large corporates and banks increase the risks of contagion and spillovers between the financial system and the real economy and vice versa.

- Impediments to supervision: Complex organizational structures may impede authorities to conduct effective consolidated supervision of the financial entities within the corporate group.

- The ability of the parent or shareholders to support the bank in times of crisis.

  • To mitigate these concerns authorities have imposed specific requirements for tech firms to operate a licensed bank. These requirements vary by jurisdictions and go from the imposition of a financial holding company structure covering all in-house financial activities to facilitate consolidated oversight (China and Hong Kong) to the application of higher risk-based capital requirements on digital banks (Singapore) or the imposition of higher capital ratios to tech-owned banks in relation to traditional bank startups (US).

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