What has happened?
The Financial Stability Board (FSB) has published two reports on the stability implications of finance offerings from BigTech companies – large companies with established technology platforms – and the adoption of cloud computing and data services for a range of functions at financial institutions (FIs).
What does this mean?
The first report, 'BigTech in finance: Market developments and potential financial stability implications', considers the financial stability implications of BigTech firms, which are playing an increasingly prominent role in the financial system and have started to provide financial services.
The FSB said that the entry of BigTech firms into finance has numerous benefits, such as the potential for greater innovation diversification and efficiency in the provision of financial services.
They can also help with financial inclusion, particularly in emerging and developing economies, where they could increase access to financial services by previously unbanked people, and facilitate access to previously untapped markets, which is particularly important for SMEs competing with incumbents in financial services.
However, BigTech firms may also pose risks to financial stability.
Some risks are similar to those from financial firms, arising from leverage, maturity transformation and liquidity mismatches, as well as operational risks like those that might stem from shortcomings in governance, risk and process controls.
The report highlights concerns around the possibility of BigTech firms growing quickly in financial service offerings, given their huge resources and access to customer data, which could be "self-reinforcing via network effects".
A further "overarching consideration" is that a small number of BigTech companies could dominate, rather than diversify, the provision of services in some jurisdictions.
If this were to happen, the failure of these companies could mean widespread disruption, especially if their financial activities were not monitored for appropriate risk management and regulatory compliance or if their customers could not easily switch providers.
The entry of BigTech firms into financial services also raises a range of issues for policymakers.
Although the activities of these companies may be subject to regulation in most jurisdictions, a question arises as to whether additional regulation and/or financial oversight might be needed.
"Regulators and supervisors might also be mindful of the degree to which the resilience of incumbent FIs and the viability of their business models might be affected by their interlinkages with and competition from BigTech firms," the FSB said.
Finally, the ability of BigTech to leverage wide-ranging customer data brings up questions around how financial authorities should approach data rights, particularly in the wider context of data protection regulations.
Third-party dependencies in cloud services
The use of third-party services is nothing new, but recently the adoption of cloud computing and data services across functions at FIs raises new financial stability implications for authorities that stem from the scale of services provided via the cloud and the small number of globally dominant players.
The FSB's second report, 'Third-party dependencies in cloud services: Considerations on financial stability implications', assesses what the FSB has learnt in this area to date and lists considerations on financial stability and options for international discussions going forward.
Among others, the report said that cloud service providers can offer benefits over previous technology, such as on-premises data centres.
Further, by creating geographically dispersed infrastructures and investing in security, cloud providers may offer significant improvements in resilience for FIs, as well as enabling them to scale more quickly, deliver improved automation and operate more flexibly.
Economies of scale could also result in lower costs to clients.
However, issues could arise because of operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers.
This could detrimentally affect the ability of FIs and authorities to assess whether a service is being delivered in line with legal and regulatory obligations.
Although the report concludes the use of cloud services by FIs does not pose immediate financial stability risks, it suggests that authorities could benefit from having further discussions to assess:
- the adequacy of regulatory standards and supervisory practices for outsourcing arrangements;
- the ability to coordinate and co-operate, and possibly share information when considering cloud services used by FIs; and
- the current standardisation efforts to ensure interoperability and data portability in cloud environments.
Please let us know whether you have any question on the FSB reports or what the implications might be for your organisation.