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As big techs continue to push into financial services on the back of their data-driven business model, it is increasingly evident that the current regulatory approach is not fully fit for purpose to address related policy challenges. A regulatory re-think is warranted, and it is high time to consider tangible options for action.

One of the following approaches could serve as a basis for a new regulatory framework for big techs in finance. The "restriction" approach would prohibit big techs from engaging in regulated financial activities. The "segregation" approach would require big techs to form a financial subgroup that would be ring-fenced. And the "inclusion" approach would impose group-wide requirements on governance, conduct, operational resilience and, only when appropriate, financial soundness. The segregation and inclusion approaches are to some extent compatible, and in practice a combination of both may be desirable.

Regardless of the approach chosen, the implementation of any new regulatory framework raises a host of practical questions. To support the search for answers, a thorough international policy debate is essential. After all, international standards are the only way to shape a consistent policy response.

Big techs and data

We at the BIS have been closely following large technology firms (big techs) and their advances into finance.

2 Big techs’ reach extends across a wide range of industries, with existing core businesses grounded in e-commerce and social media, among others. From this base, they have expanded into finance.

To understand how big techs can easily make forays into finance, one must grasp the key role of data. Indeed, big techs have fully embraced the centrality of data in the digital economy. This is what distinguishes them from other firms. It also shapes their unique characteristics. Let me mention those that are particularly relevant for policymakers.

First, big techs can overcome limits to scale in financial services provision by using user data from their existing businesses. Their business model revolves around users’ direct interactions and the data generated as a by-product of these interactions. They use that data to offer a range of services that exploit the inherent network effects in digital services, a phenomenon where more users attract ever more users. In this way, big techs can establish a substantial presence in financial services very quickly through what we call the “data-network-activities” (DNA) loop.

Second, big techs collect different types of data from the various business lines they straddle.3 They are uniquely positioned to combine that data to uncover patterns and insights that can help them improve their services or offer new ones.4 This combination of different types of data across sectors carries efficiency gains and is key to big techs’ provision of digital services.

Third, big techs are unrivalled experts in data management and analysis. They devote significant resources to developing or acquiring state-of-the-art technologies. After all, access to large troves of data generates value only if you also have the technological capabilities to analyse it and monetise it. Big techs have been pioneers in leveraging artificial intelligence techniques for this purpose. 5 To be sure, these capabilities have high fixed costs, but once that is overcome the marginal cost of handling more data is negligible. Therefore, big techs benefit from significant economies of scale in their use of data. For other firms, reaping the benefits of such economies of scale is a tall order.

Data management is thus at the core of big tech activities, and the financial sector is all about managing information. Coupled with big techs’ relentless drive to expand, their growing and already substantial footprint in financial services should come as no surprise. Moreover, the trend towards greater digitalisation, which the Covid-19 pandemic has accelerated, has allowed big techs to fortify their market positions even further.