The central bank last week said that even as the presence of Big Tech holds a promise of supporting financial inclusion and encourage competition with banks, important policy concerns still arise.
The Reserve Bank of India (RBI) said such issues have intensified around a level playing field with banks, operational risk, too-big-to-fail issues, challenges for antitrust rules, cyber security and data privacy.
Big Tech, is an industry nomenclature attributed to a group of United States based companies -- Alphabet owned Google, Apple, Facebook, Amazon, and Microsoft -- which are five of the world’s largest and digitally dominant companies.
RBI made the comment in its biannual Financial Stability Report, which comprises contributions from India’s financial sector regulators and reflects a collective assessment of the sub-committee of the Financial Stability and Development Council (FSDC-SC) on risks to financial stability in the country.
Big techs offer a wide range of digital financial services and have a substantial footprint in the payment systems, crowdfunding, asset management, banking and insurance of several advanced and emerging market economies, the report said, elaborating on its support to potential financial inclusion.
However, big techs present at least three unique challenges, the report added.
“First, they straddle many different (non-financial) lines of business with sometimes opaque overarching governance structures. Secondly, they have the potential to become dominant players in financial services. Thirdly, big techs are generally able to overcome limits to scale in financial services provision by exploiting network effects,” as per the report.
With a digital economy expanding across borders, international coordination of rules and standards becomes more pressing, RBI said. Financial stability objectives are possibly best pursued by “blending activity and entity-based prudential regulation of big techs,” it said.
RBI added that an activity-based approach, applied in areas such as anti-money laundering (AML) and combating the financing of terrorism (CFT), is the provision of cloud services, where minimising operational and in particular, cyber risk is paramount.
Other pre-existing challenges facing banks include climate-related risks, cyber-attacks, increased competition from the entry of fintechs. Among immediate risks identified, was a possible rise in corporate insolvencies and non-performing loans (NPLs), sovereign exposures, exposure to highly leveraged non-bank financial intermediaries (NBFIs) and hedge funds, the report said.