Fintechs and incumbent banks could benefit should global regulators and competition authorities force large technology companies (bigtech) to share data to address competition concerns, said Fitch Ratings in recent published commentary. The direction and prioritization of regulation forcing data sharing and “same activity, same regulation” will be key to determining how the rapid digitalization of finance and competition from bigtech will affect bank and non-bank sectors.
New regulations could support continued innovation for the financial sectors by allowing sourced data to be used across silos, and enhancing credit data bureaus with insights gained through machine learning technology. Beyond the payments sphere, Fitch believes that fintech’s and bigtech’s respective footprints may become economically more significant within emerging market (EM) regions such as parts of Latin America, Africa and Asia, where centralized credit-scoring bureau data tends to be less robust, regulations are less stringent and large under-banked populations reside.
The accelerated use of online platforms in light of the pandemic has led to increased data and insights that will shape the playing field for financial institutions. Anti-competition concerns are becoming an increasing focus for regulators in view of the growing size of the digital economy, which is estimated at between 4.5% and 15.5% of global GDP in 2019, according to the European Commission.
The increased activity of bigtechs in finance, particularly in payments processing, is driving authorities toward a more comprehensive regulatory approach that includes competition and data-privacy objectives. Regulatory concerns center on bigtech’s perceived ability to scale up and establish a dominant position quickly. Bigtech’s interest in payments and, to a degree, vendor financing is primarily focused on data generated between fund senders and recipients, rather than providing a full-stack of banking services with funding, capital and regulatory requirements. Within emerging market (EM) regions, bigtech platforms also provide access to money market funds and basic insurance products.
Customer transaction data gathered by bigtech with insights drawn from machine-learning technology can benefit credit scoring models used for loan approvals where traditional credit data is lacking. Big data, beyond the data sets of banks and traditional credit bureaus, can also be used to market, distribute and price third-party financial services, with banks and non-bank financials benefitting from improved efficiency and enhanced customer acquisition and retention. However, questions remain regarding the approaches authorities can and will take in respect to data portability, and access. Namely, how much data can and should be shared, which jurisdiction data resides within, if data security can be ensured, and to what extent bigtech data repositories can truly be measured.
Media reports suggest that Chinese regulators plan to instruct internet platforms to feed their loan data to nationwide credit agencies that will share the data more widely with banks and other lenders to evaluate lending risks. This follows November’s draft regulations targeting Chinese online microloan fintechs. In December 2020, the EU proposed draft digital markets regulation forcing providers of core platform services to share data provided and or generated by business users to end users, and to provide free, unhindered access to third parties acting on behalf of end users. This could give smaller fintechs and banks the ability to better price for risk.
An outstanding question is whether the focus on payments processing by bigtech and fintechs could, in the longer-term, herald a broader unbundling of banking services focused on fee-based income streams, relegating banks to provide white-labeled regulated banking infrastructure services with low returns.