Big Tech in Finance
Big Tech companies have entered the world of finance. With instant payments, digital currencies and integrated financial services, these companies are becoming a growing player in the sector. What kind of services do these companies provide, what implications might that have for the financial system as we know it, and what risks and benefits do these companies bring into the financial markets?
Big Tech companies (Google (Alphabet), Apple, Microsoft, Facebook (Meta) and Amazon) are companies with established technology platforms and are among the largest companies in the world today with revenues larger than the GDP of most countries in the world. With social media platforms, software and hardware for computers and phones, search engines and e-commerce, these companies are truly the foundation of today’s digital and online commercial world.
Big tech entering finance
That Big Tech are experimenting with new technology and entering new areas of commerce is not new to anyone (not many missed Facebook founder Mark Zuckerberg’s introduction to the company’s idea Metaverse a few weeks ago). These companies are very outspoken about their ambitions and visons. However, these companies developments/entry into the financial sector has been done in a less outspoken way, almost under the radar.
During the last few years, Big Tech companies have entered the financial markets, driven by the large digitalisation of the sector as a whole. The trend is global, but we can see a diversification in the strategy. In financial developed parts of the world Big Tech companies have focused on some financial services, whilst in less financially developed parts they have focused on a broader set of financial services. Especially in payments we see how they are rapidly developing its services here in the Nordics as well. The motivation for Big Tech to enter the sector is not just for profit, experts argue that the opportunity to use financial services to gather even more data and information on people is the key motivation.
As mentioned earlier, the area in the financial sector where Big Tech companies have made the biggest progress (so far) is in payments. Here we have Apple pay, Google Pay and WhatsApp pay (Facebook) as some of the biggest examples. Out of these, Apple Pay is the leading one with estimations on over half a billion users worldwide and the mostly used mobile payment method in the world. Most of its users are in USA and Brazil, but due to the explosion in use of contactless payments during the pandemic it is growing in Europe and the Nordics as well.
The strategy for the Big Tech companies have been to build in the payment tools into existing apps or devices. With Facebook pay and WhatsApp pay they are extras in the existing applications, whereas Apple Pay is available for everyone with an iPhone. This makes it extremely smooth and is in line with how these companies are revolutionising the world’s business models. The profit is made on the transaction cost.
There are additional services besides mobile payments. Facebook are working on its own currency, Diem. Amazon and Apple are providing their own payment cards. Google are providing their customers with actual bank accounts. The last example is extra interesting and going under the name Google Plex. The service lets you open a bank account in one of the company’s partner banks, and Google is only acting as a realter while the banks take all the risk and legal obligations.
Possible implications and risks
So far none of the Big Tech companies have expressed their wish to apply for a bank license and going fully into the financial market, which points to a strategy where they want to continue to act as a “middleman” for financial transactions. This strategy would also go hand in hand with the motivation discussed above, that the big goal of entering the finance market is to gain more data and information on people.
This potential strategy will have large implications for the traditional financial institutions. With the example of Google Plex, we can see that banks risk becoming subcontractors to the Big Tech companies, sitting with all the risk, bank license, compliance, and legal responsibilities but without the customer contact. This potential development has been raised by both Finance Denmark and Finance Norway. This development, together with the enormous amount of data Big Tech companies already have on all of us, might be a threat to the level playing field in financial services.
There are also other risks with Big Tech entering financial markets. The Financial Stability Board is warning that it might pose some risks to financial stability, linked to issues of potential shortcomings in governance, risk and process controls. Other risks are linked to the enormous amount of data and information that Big Tech companies already has on customers due to their social platforms. One risk is that they enter the market to quickly (using the data they already have), which might again threaten the financial stability. Another is that if some few companies (the Big Tech companies) dominate the market to such an extent that they have almost full control, the effects if one of them goes down would be devastating.
We cannot stress enough that even though there are some potential risks, there are also a lot of benefits coming from Big Tech entering the financial sector. The first one, and an obvious one, is that Big Tech have the same role as Fintech has: they spur the development in innovation of financial services. These are the richest companies in the world with some of the most advanced technology, of course their entering into finance will push innovation. Another important contribution is that they can improve financial inclusion, something that is very obvious when we look at where in the world these companies’ financial services are mostly used. Besides the US, the largest markets for Big Tech financial services are in India and Brazil (not to mention the Chinese company Alibabas users in China).
Challenges of the future
It is too early to say what the long-term effects will be of Big Tech’s entering into the financial sector. But we can speculate, and it is an issue that is gaining a growing interest of financial institutions, policy makers and regulators.
From a Nordic perspective, the issue can be taken down to one benefit and two challenges. First, the biggest benefit with Big Tech entering the financial sector is the competition they provide that push innovation forward. The Nordic region is already one of the most digitalised regions in the world and this is especially true when it comes to financial services. One reason for this development is linked to the region’s many Fintech companies that are challenging the traditional financial institutions to innovate. More competition from Big Tech might further push this development.
The biggest risk that Big Tech companies are to all of us, not just in finance, is their enormous amount of data and information they have on all of us from their platforms and devices. We do not fully understand the level of data that is gathered on all of us second by second already. That Big Tech enters into finance, with the clear motivation of gathering more information on all of us, is raising a lot of concerns connected to data ethics and privacy. This issue is, as mentioned, already a large issue and therefore has already gathered a great amount of attention from policymakers. The EU is currently working on the Digital Services Act and Digital Markets Act, with a clear focus on regulating these issues (and with Big Tech as a clear group to regulate). If we see the large lobby efforts from Big Tech in the EU right now, mentioned in Morten Clausens’ blog earlier this autumn, it might be a sign that it will have effect.
Looking more into the future, the common view of Nordic financial experts is that the challenge that Big Tech in finance might have, is to the level playing field. We can see in other markets where Big Tech companies have built their platforms, they have become the infrastructure between the providers/producers and the customer. If that is to be true for the finance sector, we might end up with that Big Tech firms are providing the infrastructure for financial services but where the risk and licenses are still in the hands of the bank. This development is easy to understand why it happens, as financial actors are looking for efficient and innovative ways to hand out financial services, the same development is happening with Fintech. The threat here is that Big Tech are so big that they might demolish the level playing field in finance. Might an unholy alliance between traditional financial institutions and Fintech be the way forward here?
We cannot predict the future, if it will be good or not. But we can be sure that the entering of Big Tech into the financial sector will not be without effects. Therefore, we need to continue to follow the development closely.
Policy Advisor NFU