The BIS paper notes that the big tech firms entering financial services have the capacity to scale up very rapidly because of their existing hoards of customer data from their non-financial e-commerce or social media activities and by harnessing their inherent network effects in digital services.

In addition to traditional regulators’ concerns – financial risks, consumer protection and operational resilience – the entry of big techs into financial services created new challenges around the concentration of market power and data governance, the paper warned.

The big techs have provoked intense debate and looming regulation on competition and data privacy issues around the world – in the US they even face the threat of break-ups -- but financial regulators are still trying to get their minds around the balance between the pro-competitive force they represent against banks and other traditional institutions and the risks they might pose to system stability, fair competition and the long-term interests of consumers.

The virtuous circle that powers big tech -- the network effects generated by the fact that the more users they have, the more users are attracted to the network and the more data they gain access to – could lead to big tech companies emerging as major financial sector players quite rapidly, creating concerns about concentration of market power and systemic importance.

The BIS says that presents various policy challenges, some variations on themes familiar to central banks and financial regulators such as the mitigation of financial risks, the oversight of operational resilience and consumer protection. But also some new challenges outside of the scope of central banks’ remits that stem from the potential for excessive concentration of market power and the issue of data governance.

One of the core issues banking and competition regulators confront in trying to determine how to respond to the rise of the fintechs is the asymmetry of regulation, particularly as it relates to data.

Australian banks, and banks in some other jurisdictions, now operate in “open banking” regimes where they are required to provide access to their customer data and customers can more easily move their accounts. But tech companies, a number of who are larger than any bank, don’t have to provide access to their data and their customers are effectively locked into their networks.

Most non-banks, regardless of size, generally face activities-based regulation, where they might be required to hold a licence for highly specific business lines, if indeed any licence is required.

Banks and other big regulated institutions faced both activities-based regulation and entity-based, or whole-of-company, regulation to try to ensure that the aggregation of their activities doesn’t pose risks to financial stability, competition, consumer protection, money-laundering and other public policy objectives.

The BIS says a common thread in international legislative initiatives have been provisions aimed at preventing data concentration and anti-competitive practices by the big tech companies. For central banks a “natural follow-up” would be to study their potential systemic relevance and the need to introduce specific safeguards to guarantee operational resilience, it said.

That might be particularly relevant for those big techs that offer systemically important payment services to a significant proportion of the population – as Apple, for instance, does here.

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BIS says central banks and financial regulators should “invest with urgency” in monitoring and understanding the multi-faceted public policy challenges posed by the entry of the big tech companies into their payments systems.

There’s little doubt that big tech, and smaller fintechs, are going to play an increasing role in the financial system and that some, left largely unregulated, will be able to leverage their vast stores of data into positions of systemic – possibly globally systemic – significance.

The nature of the companies means they don’t fit neatly into existing regulatory silos. They will have to be responded to by a blend of financial, competition and data privacy regulators and legislation and those regulators have different, sometimes conflicting, objectives.

The foray of companies like Apple and Square into payment systems and the blend of consumer credit, other financial services and non-financial activities that the combination of Square and Afterpay, or companies such as Apple, Facebook, Google and Amazon (or Alibaba and Tencent) present dictates a more coherent and co-ordinated response from a range of regulators and legislators.

The rate at which the landscape is changing, the uneveness of the playing fields and the potential for mega-mergers (the Square and Afterpay combination will create a near $200 billion company) to reshape that landscape almost overnight adds some urgency to that task.

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