Push by regulators to force leading tech firms to share data could provide a huge opportunity for other players, says Fitch Ratings.
The ability to harness big data to accelerate digitalisation will be a key factor in determining the long-term winners and losers in the banking sector, according to a recent report by Fitch Ratings.
Efforts by global regulators to force dominant US tech firms such as Amazon, Google, Facebook Microsoft and Apple to share data to address competition concerns could provide a significant opportunity to fintechs and incumbent banks, the report claims.
“The accelerated use of online platforms as a result of the Covid-19 pandemic has led to increased data and insights that will shape the playing field for financial institutions,” Fitch analysts Nathan Flanders and James Longsdon wrote.
Anti-competition concerns are becoming an increasing focus for regulators in light 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.
In December, 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.
“The increased activity of big tech in finance, particularly in payments processing, is driving authorities toward a more comprehensive regulatory approach that includes competition and data-privacy objectives,” Mr Flanders and Mr Longsdon wrote.
Regulatory concerns centre on the dominant tech companies perceived ability to scale up and establish a dominant position quickly.
As the leading US tech giants shift attention to providing financial services, the extent to which competition authorities to force data sharing will be key to determining how much of a threat they represent to the wider financial sector.
“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,” Mr Flanders and Mr Longsdon wrote.
Emerging market influence
Beyond the payments space, the respective footprints of ‘Big Tech’ and fintech could become economically more significant in emerging market regions in Latin America, Africa and Asia, according to the report.
“[In emerging markets] centralised credit-scoring bureau data tends to be less robust, regulations are less stringent and large under-banked populations reside,” the analysts wrote.
Leading tech giants 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.
New regulations could support continued innovation for the financial sectors by allowing sourced data to be used across silos... with insights gained through machine-learning technology
Within emerging market regions, the leading tech companies’ 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,” Mr Flanders and Mr Longsdon wrote.
Big data, beyond the data sets of banks and traditional credit bureaus, could 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.
According to the Fitch report, 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.”
Chinese regulators reportedly 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 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,” Mr Flanders and Mr Longsdon wrote.
“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.”
