The Financial Stability Board (FSB) based in Basel published a report on the application of technology to finance, or fintech, and the structure of the financial services market. The subtitle of the report, more in-depth, reveals the intentions of the authors: “changes in the markets and implications for financial stability”.
The premise of the report is simple. The entrance of the big technology companies, the Big Tech, to the financial scene can “affect the degree of concentration and contestability of financial services, with benefits and potential risks for financial stability”.
A multitude of newcomers
The emphasis is on companies such as Apple, Google, Facebook, Amazon and Ant Financial, rather than the multitude of fintech that are appearing in Silicon Valley, Israel or the vicinity of Old Street in London. Central banks and finance ministries are beginning to wonder whether the mega-tech activities, whose market capitalizations already far exceed even those of the largest banks, will be totally beneficial.
It is surprising that those questions have not been asked before (the genius that has already escaped the bottle comes to mind). In Europe, regulatory changes such as the Second Payment Services Directive (PSD2) have been crucial for the opening of the banking system; and various regulatory bodies, for example, the Financial Conduct Authority of the United Kingdom, have long used the idea of the regulatory sandbox: a test environment that helps entrants into the market to structure themselves to meet the standards. PSD2, whose idea is often described as “open banking”, forces banks to share customer data with non-bank providers of payment methods and account information services. In this way, the “aggregators” can present the client with a comprehensive vision of their finances and offer additional services.
It may be time to assess the risks of open banking for financial stability during the consultation period before the approval of the board. Right now, the list of entities that contributed to the FSB report shows that the European Commission and the main regulatory bodies in Europe and North America did not participate.
What was the conclusion of the FSB?
The authors begin, tactfully, doing a series of compliments to Big Tech. They rightly say that “the greater efficiency of new players can improve the efficiency of financial services in the long term.” Undoubtedly, the absence of certain costs, for example, those derived from old computer systems and networks of underutilized branches (considered a kind of public service and, therefore, difficult to rationalize), allows cheaper digital mechanisms for the provision of services, that would be the envy of the banks.
It is also entirely reasonable to argue, as the authors do, that greater competition in the provision of financial services can benefit consumers by broadening the range of options, stimulating innovation and reducing transaction costs. The pressure on traditional suppliers is generating strong incentives to reduce costs and improve service. The established companies can no longer rest on their laurels, as they did when the transfer of accounts was infrequent. But the FSB also points out that with the application of the cross-subsidy, the Big Tech could gain market share quickly and take the current suppliers out of play. So “their participation may not generate a more competitive market in the long term.”
It is a warning that the authorities should listen to; but the FSB is supposed to be most interested in stability, and in this the report is ambiguous. On the one hand, the authors argue that greater competition can create a stronger financial system, in which the essential infrastructure is spread across a wider variety of companies. On the other hand, the competitive advantages of new entrants with respect to banks can leave these “potentially more vulnerable to losses”. According to the report, the resulting reduction in “undistributed profits as a source of domestic capital” may have an “impact on the resilience of the financial sector and its assumption of risks.”
While the report is unequivocally positive in terms of the impact of new emerging fintech companies (whether they remain independent entities or join existing banks to create complementary offers), in relation to the Big Tech the conclusions of the authors are much more cautious. Although previous analyzes speak of a small or beneficial effect of fintech on financial stability, the FSB believes that “this can change rapidly as the participation of large technology providers increases”.
A possible factor of financial instability that identifies the report is that banks unwisely relax the criteria for granting loans. In my opinion, there is little risk of it happening. Banks have already gone through that, in times that are still fresh in memory, and do not want to go back there. But the risk of loss of profitability is real, especially if, as the FSB considers possible, price strategies based on offering products for less than the cost to attract customers are adopted. The authors explicitly mention the risk of cross-subsidy. Banks in Europe today do not have the favor of investors (most of them listed on the stock market well below their book value); A significant loss of market share in payment services would further threaten its viability.
In response, the FSB (obviously) asks for “vigilance” on the part of the banking supervisors (when would they have been told that it was a good time to be careless?). But I wonder if the solution really goes through the bank supervisors. If the report had received the input of a wider variety of authorities, perhaps they would have recommended, more accurately, that there be an oversight by the agencies responsible for supervising commercial conduct and competition. Following the same logic of the FSB, the most probable risks are in the field of these organisms.
Also published on Medium.