Powerful tech companies are expanding into financial services, which contribute about 11.3% of the aggregate revenues collected by a select group of a dozen leading players worldwide, according to an extensive report from the Bank for International Settlements (BIS). The twelve include Amazon.com Inc. (AMZN), Facebook Inc. (FB), Google parent Alphabet Inc. (GOOGL), Apple Inc. (AAPL), Alibaba Group Ltd. (BABA), Tencent Holdings, Baidu, Kakao, Samsung, Mercado Libre, and Rakuten.
"The entry of large technology firms ('big techs') into financial services holds the promise of efficiency gains and can enhance financial inclusion," the report states, while warning that regulators face challenges in dealing with them. "Big techs' entry presents new and complex trade-offs between financial stability, competition and data protection," the BIS states, adding that "Regulators need to ensure a level playing field between big techs and banks, taking into account big techs' wide customer base, access to information and broad-ranging business models."
Significance For Investors
As a key player in the international financial system, often described as the central bank for central banks, the BIS has an obvious concern with how big techs may change the competitive and regulatory landscape in banking and finance. The report notes that its advance into financial services has been most pronounced in China, the home country of Alibaba, Tencent, and Baidu.
Payment services were an initial point of entry into financial services for many of these firms, with offerings such as PayPal, Apple Pay, Google Pay, and AliPay (from Alibaba). The report indicates that overcoming a lack of trust between buyers and sellers on e-commerce platforms was a primary motivation for developing these services.
Facebook, meanwhile, has a digital currency under development that has been called Project Libra or GlobalCoin, in various press reports. Morgan Stanley has observed in a recent note that this holds the potential to place Facebook and its partners into competition with existing central banks such as the Federal Reserve, Barron's reports. However, the BIS appears to be less concerned, having relegated this project to a footnote in its report.
On the other hand, the BIS observes that big techs may have a huge advantage over other players in financial services, both existing and potential, given their control of key technical infrastructure and vast amounts of user data. This could lead to monopolistic or discriminatory pricing, as well as the ability to shut out competition, if not regulated properly.
Data analytics, network externalities, and interwoven activities, abbreviated as "DNA," are key aspects of these companies' business models that tend to reinforce each other, the BIS says. Network externalities, which represent the benefits associated with using a given platform, increase as the number of users rises for a given platform and as more services are available through it.
More users and more services mean more data and better analytics, allowing for yet more improvement in the platform and the functions delivered through it, as well as more targeted advertising and service offers, the report notes. While big banks have large numbers of clients and large arrays of services, "so far they have not been as effective as big techs at harnessing the DNA feedback loop," the BIS concludes.
"Big techs' DNA can lower the barriers to provision of financial services by reducing information and transaction costs, and thereby enhance financial inclusion. However, these gains vary by financial service and could come with new risks and market failures," the report asserts.