Is there a Big Risk to the Banking & Financial Sector by BigTech Giants Entering Fintech 

By Vijeth Shivappa

The Reserve Bank of India, in its 25th Financial Stability Report (FSR) released on 30th June 2022 , said the entry of Big Tech giants in to FinTech has exposed the banking system to new risks. The new risks extend beyond prudential issues and often intersect with other public policy objectives relating to safeguarding of data privacy, cyber security, consumer protection, competition and compliance with anti-money laundering policies.

“The complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour,”as stated in the report released on Thursday 30th June 2022. The report pointed out that the financial technology (FinTech) industry has undergone tremendous growth over the past few years. The global FinTech market size was valued at USD 111 billion in 2020, and is projected to reach USD 698 billion by 2030, growing at a CAGR of 20.3 per cent.

The report further said the adoption of FinTech can promote financial inclusion, broaden offering of financial products and services, increase efficiency for delivery of financial services, and lead to better accessibility, affordability and enhanced customer experience.

RBI in its report has pointed out that FinTech innovations are ubiquitous, especially in retail and wholesale payments, financial market infrastructures, investment management, insurance, credit provision and equity capital raising and may lead to material changes in the financial landscape.

Concerns Raised

Global spillover : US rate increase and the threat of recession; Ukrain crisis; Oil price rise.

Risks of Fintech: The report cautioned that the advent of fintech has exposed the banking system to new risks such as safeguarding of data privacy, cyber security, consumer protection, competition and compliance with AML (anti-money laundering) policies.

The Indian FinTech industry, which is amongst the fastest growing in the world, was valued at USD 50-60 billion in 2020 and is projected to reach USD 150 billion by 2025. India has the highest FinTech adoption rate globally (87 per cent) receiving funding of USD 8.53 billion (in 278 deals) during 2021-22.

Risk from BigTechs (big technology firms): They can scale up rapidly and pose risk to financial stability, which can arise from increased disintermediation of incumbent institutions.
Moreover, complex intertwined operational linkages between BigTech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour.

Cryptos a ‘clear danger’: RBI Governor termed cryptocurrencies as a “clear danger” and anything that derives value based on make-believe, without any underlying, is just “speculation under a sophisticated name”.

Call to action

This requires more engagement of regulators, FinTech industry and academia to work towards common principles for management of FinTech activities, including business and revenue models, governance, conduct and risk management, it said.

There is a need for entity-based and outcome-based regulation.

Globally coordinated regulatory approach and inter-regulatory coordination: This will enable comprehensive assessment of such activities, activities and mitigation of risks.

Leveraging technology
Use of artificial intelligence and machine learning to determine the credit worthiness of a borrower

Absolute Transparency 
The methodology of algorithms underpinning digital financial services has to be “clear, transparent, explainable and free from exclusionary biases”.

The Reserve Bank of India (RBI) has come up with a document ‘Payments Vision 2025’. As part of its Vision 2025, the RBI will attempt regulate big tech and fintech in the payments space.This will explore guidelines on payments that involve BNPL(buy now pay later) services.It will work towards the introduction of CBDC (central bank digital currency). Also inclusion of rupee in continuous linked settlement (CLS) (CLS provides protection for cross-currency settlement in 18 currencies).

The RBI will soon be issuing guidelines to make digital lending ecosystems “safe and sound while enhancing customer protection and encouraging innovation”.In the age of technological changes, banks should not just work like banking service firms but like technology companies.Authorities and regulators have to strike a fine balance between enabling innovation and preventing systemic risks.

–  All views expressed are personal