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Tearsheet Briefing: How regulators view Big Tech’s entry into consumer finance

  • Big Tech firms may have a competitive advantage over banks and fintechs due to a vast and active user base, creating scale and scope, and network effects in their core markets.
  • Federal banking regulators are looking to strengthen policies that promote healthier competition and responsible innovation while protecting the needs of consumers.

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Tearsheet Briefing: How regulators view Big Tech’s entry into consumer finance

Over the last few years, Big Tech firms have been expanding their footprint in finance, looking to add new revenue lines from the financial services sector. From biometric payments to identity verification, Big Tech companies are leveraging their infrastructure and targeting key financial services verticals by building new partnerships, products, and M&A deals.

Big Tech already enjoys a vast and active user base, creating scale and scope, and network effects in their core markets. They can utilize their scale to convert segments of their user base into financial services customers while cutting back on marketing and customer acquisition expenses.

“Because tech firms are not subject to interchange limitations under the Durbin Amendment, they often have an advantage of scaling and monetizing their business in a way that traditional banks cannot,” said Sheetal Parikh, VP of Compliance Solutions and Associate General Counsel at Treasury Prime.

Source: Oliver Wyman

This means that Big Tech firms have a competitive advantage against banks and fintechs. They own many of our digital interactions, and they're already making inroads into banking – whether it's Google adding checking accounts, Amazon offering installment loans, or Apple bringing in digital wallets. 

However, just like fintechs, these firms also rely on partnerships with traditional financial institutions in some capacity to deliver nearly all of the financial services they offer.

Big Tech may know how to create great user experiences and innovative products that attract customers, but it's banks that are skilled at understanding compliance, treasury, and credit risk management, which are difficult tasks for Big Tech companies. 

Nevertheless, Big Tech sits atop a plethora of consumer data, which can be used to create tailored financial products, resulting in a better understanding of consumer behaviors, and eventually customer satisfaction.

In fact, it's this data that sits at the core of a major trust issue Big Tech continues to face – privacy concerns around the potential misuse of personal data have failed to be resolved despite tech companies' efforts to allay these concerns.

“Big Techs have intimate information about their users, which can be leveraged to build tailored financial products, advertisements, or promotions for their audiences. Given Big Tech’s monetary resources, they can give financial promotions or discounts that are difficult to match. However, the general public does not have a positive view of Big Tech due to data privacy, and will steer clear of allowing them to also manage their finances,” added Luis Trujillo, Chief Compliance Officer at Alviere.

And data will always be an incentive – entering financial services is attractive for Big Tech firms in part because it would provide them with access to additional customer financial data, augmenting their existing customer data-driven business models.

As technology companies continue to add services that are peripheral to core banking without becoming fully functional banks or acquiring full-stack banking licenses, regulators feel the need to ensure they’re subject to common ground rules in order to prevent an unfair advantage for them.

Federal banking regulators are looking to strengthen policies that promote healthier competition and responsible innovation while protecting the needs of consumers.

In October 2021, the CFPB ordered Big Tech players and other large technology and peer-to-peer platforms that operate payment services (Amazon, Apple, Facebook, Google, PayPal, and Square) to provide information about their business practices, including their data collection and use. 

A US Treasury report assessing how the entry of large technology firms and other non-bank companies into consumer finance affects competition found that Big Tech firms entering core consumer finance markets "could increase competition for incumbent financial services providers and bring certain benefits to consumers by increasing convenience, using more advanced technology, or lowering prices." 

But the flip side is that Big Tech firms may be able to use "data advantages, network effects, mergers and acquisitions, predatory pricing, and other tactics to gain or entrench market power to the detriment of competition." 

This is why regulators are considering the following, according to the US Treasury report:

i) Responsible consumer credit underwriting: By determining and restricting the data points that are used during the underwriting process by credit risk decisioning algorithms and systems, regulators can promote credit equity and transparency.

Some of these data points include factors such as addresses and zip codes. Regulators, however, will have to consider the potential effects on institutions, resulting in a negative impact on the performance of their credit portfolios.

ii) Effective oversight of bank-fintech relationships: Regulation and supervision are critical when it comes to the management of bank-fintech relationships. Currently, the lines between the roles of fintechs and banks in a partnership are blurry. 

Due to the well-documented failure of many banks in managing these relationships and effectively mitigating the risks that they incur, this lack of regulatory enforceability exposes – both consumers and banks – to undue risks. This is a key area that requires special attention from agencies, as emphasized in the report.

iii) Support small-dollar lending: Following the economic impact of Covid-19, agencies encourage financial institutions to offer responsible small-dollar loans to consumers and small businesses to fulfill their credit needs in case of unexpected cash flow imbalances.

Loans need to be offered in a manner that provides fair treatment for consumers, complies with applicable laws and regulations, and is consistent with safe practices amid the current economic climate.

iv) Enable secure data sharing: While data portability helps in building a more competitive and innovative financial services sector, regulation and protection of consumer financial data aggregation activities go hand-in-hand.

Research indicates that while consumers want to leverage data portability, they are reluctant to share any data beyond what is required for a given use case, and prefer discretion.

Regulatory bodies will need to maintain a balance and draw boundaries on what user data can be accessible by financial institutions, how often it can be made available, and how long that data can be accessed for.

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