A senior board member at the Bank for International Settlements has called for a co-ordinated regulatory response to restrict the incursions of Big tech firms like Amazon, Apple and Google into financial services, arguing that the current rules are "not fit for purpose".
Speaking at a BIS conference in Switzerland, Agustín Carstens, BIS general manager, says: "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."
He argues that Big Tech mastery of user data coupled with their size and customer reach could trigger rapid change in the financial services industry, leaving established banks at a competitive disadvantage.
While Big Techs can initially bring greater competition, he says, network effects allow them to quickly build positions of dominance in specific market segments, for example by increasing user switching costs or raising barriers to entry. As systemic entities, they may also become 'too big to fail', raising fears for financial stability.
Carstens says that the current regulatory approach was not designed with Big Techs in mind and therefore is not geared towards possible spillover effects across all the activities such firms perform, or their potential systemic relevance.
He outlines three possible alternative approaches as a basis for a new regulatory framework that moves away from 'activity-based' rules and regulations to 'entity-based'.
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 financial soundness.
"The segregation and inclusion approaches are to some extent compatible, and in practice a combination of both may be desirable," he says. "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."