The Reserve Bank of India (RBI) has recently released a new report, which identifies the various challenges to financial stability posed by large non-financial technology firms, commonly referred to as “big techs”. Their technological advantages, extensive user base, wide use by financial institutions, and network effects are major contributing factors.
Understanding Big Techs
Big techs are high-profile companies such as Alibaba, Amazon, Facebook, Google, and Tencent. These giants usually hold service licenses either through subsidiaries or joint ventures, with different levels of ownership control and jurisdictional regulatory advantages.
The Increasing Involvement of Big Techs in the Market
Being widely adopted as third-party service providers, big techs become the fundamental platform on which a plethora of services are delivered. This strategic positioning allows them to effortlessly gather cross-functional databases. These can then be utilized to develop innovative product offerings, thus securing their dominance in the market.
Moreover, big techs, with their far-reaching influence, generate strong network effects through access to extensive customer data from a large client base who regularly use their platforms and products. The entry of big techs into finance also demonstrates strong complementarities between financial services and their core non-financial services.
India’s Response to the Rise of Big Tech
In response to this phenomenon, India has initiated local storage of payment data and incorporation of critical payment intermediaries into the formal framework. Other initiatives include enhancing the payment acceptance infrastructure and creating a data protection law.
Risks Associated with Big Techs in Financial Services
Despite the benefits, big techs also pose significant risks. The complex governance structure can limit the effectiveness of oversight and entity-based regulations. The broad adoption of big techs as third-party service providers means that they underpin many services, complicating the landscape.
Moreover, big techs can act as barriers in creating a level playing field to promote fintech innovation. Concerns also abound over data privacy, with a lack of transparency in how these tech companies process user data, leading to serious privacy issues.
Suggestions for the Way Forward
In light of these challenges, a realignment of regulatory frameworks is necessary to facilitate fairness in the fintech space and manage potential risks posed by big techs. As the inter-linkages between financial institutions and tech companies grow increasingly complex, regulatory frameworks must keep pace with innovations to contain any vulnerabilities that might arise.
Additionally, emerging markets and developing economies (EMDEs) need to be aware of the new inter-linkages that big techs might create with existing financial institutions. This will ensure that regulatory measures are effectively designed and implemented.
This assessment by RBI throws light on both the opportunities and challenges presented by big techs in the financial sector. With an increasing influence on financial services, these firms are poised to continue shaping the future of the industry.
