The move to platform-based business models is changing market structure in financial services. While platforms can harness powerful economic forces to achieve efficiency gains and greater financial inclusion for the unbanked, there are open questions about the level playing field, and new and complex trade-offs between efficiency and competition, financial stability and data privacy.
Where platforms collect large amounts of data for a variety of different business lines, this may lead to network effects and economies of scale and scope. At the same, big tech firms have the potential to become dominant through the advantages afforded by the so-called data-network activities (DNA) feedback loop, raising competition concerns. The heavy use of personal data raises important data privacy issues. Because platform-based business models differ from traditional modes of offering financial services and the rules that govern these, there is the potential for regulatory arbitrage.
Public authorities across the globe have responded to the entry of fintech and big tech firms, and the growth of platform-based business models with a variety of regulatory and supervisory approaches to harness benefits while mitigating risks.
Many countries have set up innovation facilitators, such as sandboxes, hubs and accelerators. Others have adopted new licensing regimes, and updated existing regulation, to account for new entities and activities. In general, though, fintech has not yet inspired major modifications to the overall structure of prudential regulation. To date, core rulebooks on prudential safeguards, consumer protection and market integrity have been broadly unaffected.
Yet there are growing concerns about policy trade-offs and the level playing field, and some major jurisdictions are moving to more ex ante, entity-based policy measures. Platform-based business models could require further policy reforms in the future. In particular, if platforms are to enhance access to financial services without dominating markets, then proactive policies may be necessary.
This paper discusses the implications of platform-based business models in financial services for financial inclusion, market structure and regulation. Researchers argue that the economic features that make platforms so powerful in lowering costs and supporting financial inclusion are the same features that give rise to digital monopolies and oligopolies. They may raise significant risks to fair competition, and aggravate consumer protection, financial integrity and financial stability risks. This could create conflicts between various central bank and regulatory objectives.