Source: Fitch Ratings

The ability to harness “big data” and accelerate digitalisation and automation will be a key determinant of long-term winners and losers in the Financial Institutions sector, says Fitch Ratings. FinTechs and incumbent banks could benefit should global regulators and competition authorities force large technology companies (Big Tech) to share data to address competition concerns. The direction and prioritization of regulation forcing data sharing and “same activity, same regulation” will be key to determining how the rapid digitalisation of finance and competition from Big Tech will affect bank and non-bank sectors.

New regulations could support continued innovation for the financial sectors by allowing sourced data to be used across silos, and enhancing credit data bureaus with insights gained through machine-learning technology. Beyond the payments sphere, Fitch believes that FinTech’s and Big Tech’s respective footprints may become economically more significant within emerging market (EM) regions such as parts of Latin America, Africa and Asia, where centralised credit-scoring bureau data tends to be less robust, regulations are less stringent and large under-banked populations reside.

As discussed in The Next Phase: Megatrends and Financial Institutions' Ratings, the accelerated use of online platforms in light of the pandemic has led to increased data and insights that will shape the playing field for financial institutions. Anti-competition concerns are becoming an increasing focus for regulators in view of the growing size of the digital economy, which is estimated at between 4.5% and 15.5% of global GDP in 2019, according to the European Commission.

The increased activity of Big Techs in finance, particularly in payments processing, is driving authorities toward a more comprehensive regulatory approach that includes competition and data-privacy objectives. Regulatory concerns centre on Big Tech’s perceived ability to scale up and establish a dominant position quickly. Big Tech’s interest in payments and, to a degree, vendor financing is primarily focused on data generated between fund senders and recipients, rather than providing a full-stack of banking services with funding, capital and regulatory requirements. Within emerging market (EM) regions, Big Tech platforms also provide access to money market funds and basic insurance products.

Customer transaction data gathered by Big Tech with insights drawn from machine-learning technology can benefit credit scoring models used for loan approvals where traditional credit data is lacking. Big data, beyond the data sets of banks and traditional credit bureaus, can also be used to market, distribute and price third-party financial services, with banks and non-bank financials benefitting from improved efficiency and enhanced customer acquisition and retention. However, questions remain regarding the approaches authorities can and will take in respect to data portability, and access. Namely, how much data can and should be shared, which jurisdiction data resides within, if data security can be ensured, and to what extent Big Tech data repositories can truly be measured.

Media reports suggest that Chinese regulators plan to instruct internet platforms to feed their loan data to nationwide credit agencies that will share the data more widely with banks and other lenders to evaluate lending risks. This follows November’s draft regulations targeting Chinese online microloan FinTechs. In December 2020, the EU proposed draft digital markets regulation forcing providers of core platform services to share data provided and or generated by business users to end users, and to provide free, unhindered access to third parties acting on behalf of end users. This could give smaller FinTechs and banks the ability to better price for risk. This could give smaller FinTechs and banks the ability to better price for risk.

An outstanding question is whether the focus on payments processing by Big Tech and FinTechs could, in the longer-term, herald a broader unbundling of banking services focused on fee-based income streams, relegating banks to provide white-labelled regulated banking infrastructure services with low returns. Fitch will review this topic in more detail in forthcoming publications.