Big-tech banking is here, so traditional firms and regulators need to be ready - Stuart Gillies

Given current world affairs, one would be forgiven for missing some important announcements about the potential future of Twitter. The biggest, for a fintech (financial technology) nerd such as myself, must be the proposal for Twitter to enter the payments and consumer credit market by allowing users to hold and send money on the platform, process payments and even start offering money market savings accounts.

The plan appears to be inspired by the “one super app” experience, similar to China’s WeChat which combines mobile payment processing, social media, streaming services etc into the one single app.

Twitter banking may be somewhat in the future, but it already has stiff competition and this is not from traditional banking and finance providers. WeChat serves more than a billion users in China alone, while in the west we are seeing the launch of big tech savings accounts and credit cards. Other major big tech companies have all taken steps into the world of financial services, whether this is business lending, insurance or payment processing. So, what does big tech banking mean for the rest of us?

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Back in 2018, I wrote in The Scotsman asking exactly that question. The potential benefits of big tech providing financial services, using their size, technology and data collecting and analysing abilities should result in greater innovation, greater reach (to the unbanked, for example) and reduced costs through competition.

Stuart Gillies is a Senior Associate at Dentons
Stuart Gillies is a Senior Associate at Dentons
Stuart Gillies is a Senior Associate at Dentons

I also warned about the potential disruption this could cause to the market, including through competition, operational resilience and financial stability, and argued that regulators need to sit up and take notice. Big tech companies are unique in that they are built from the bottom up on a model of collecting and analysing vast troves of data across user bases in the billions. This arguably makes them better placed to make nuanced assessments of the creditworthiness of companies or individuals.

This use of big data in particular is what sets them apart from traditional banks and the reason I argued that the regulators may need to retool to best tackle this.

Fast forward four years and the good news is that the Financial Conduct Authority (FCA) is taking notice, with a discussion paper published in October, focusing on the implications of big tech entering the market alongside discussions on digitalisation, big data, machine learning and artificial intelligence (AI), and, specifically, the potential competition benefits and harms such big tech firms providing payments, consumer credit, insurance and deposit taking services might look like.

One suggestion was that big tech share their data treasure troves with traditional firms to help level out the playing field – a sign of the threat posed when usually it is the banks being asked to share their work!

Concerns that the short-term benefits (such as improved innovation and servicing the unbanked) “could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes” are to be explored – specifically, the ability of big tech to exploit their economies of scale, restrictions on switching devices and related apps/services and access to unparalleled user data by acting as gatekeepers (for example, “exploiting their ecosystems” to “lock consumers in” by restricting what payment services and apps you can use on your phone).

This follows a separate discussion paper by the Bank of England on the use of artificial intelligence and machine learning in financial services, and how it could both benefit and harm consumers. AI and machine learning is increasingly being used by financial service institutions for the likes of credit scoring, insurance risk assessment and money laundering detection.

As the availability and analysis of data improves, the reliance on such technology only increases. This introduces further challenges both to incumbent banks in how to tackle this new competition but also to regulators in how to respond to the new challenges that arise.

The FCA has invited comments by 15 January 2023.

Stuart Gillies is a Senior Associate at Dentons



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