Modern Banking - BigTech in Finance

what are BigTechs?

large technology companies whose core business is social media, telecommunications, internet search or e-commerce that provide financial services, such as payment processing and lending, leveraging their extensive customer base

how do BigTechs exploit network effects?

thanks to the data that they can use to offer wide range of services

What is the significance of BigTechs entering the financial sector?

their ability to rapidly influence the financial sector due to their large customer bases, despite finance being a non-core part of their business.

What advantages do BigTechs have over FinTechs?

• FinTechs that enter the market as start-ups

• BigTechs enter the market with distinct advantages, →access to low-cost capital

  →established global user base

  →technological expertise.  

• BigTechs can combine the technical capabilities of Fin-Techs with the scale (financial capacity and existing customers) of large incumbent banks.

→”BigTechs are FinTechs on steroids”

What are the supply-side drivers of BigTech in finance?

• Big data and machine learning developments

• Banking regulation

• Institutional factors

What are the demand-side drivers of BigTech in finance?

• credit demand

• bank competition

why BigTechs want to provide financial services?

more likely to be driven by the objective to diversify revenue streams, access new data sources, and reinforce core commercial activities

What funding barrier do BigTechs face compared to traditional banks?

Unlike traditional banks, BigTechs cannot raise and use deposits as a source of funding, which can be an important barrier to their expansion into financial services.

what are the pros and cons of BigTech in Finance?

• screening and monitoring

• financial inclusion

• price discrimination

• algorithmic biais

• privacy

• anti-competitive behavior

screening and monitoring

• banks costly

• BigTech use data and can threaten to exclude bad payers from the plateform

financial inclusion

offer service to unbanked individuals and firms who lack formal credit histories

price discrimination

BigTech can assess the maximum amount a person is willing to pay for a product or service, thus charge different prices to different customers to maximize profitss

algorithmic biais

BigTech unethical discrimination because the data used may reflect existing societal biases + manipulate customers for profit

privacy

misuse of data by the BigTechs

anticompetitive behavior

BigTech use their dominant position in digital plateforms to block or disadvantage potential competitors

what is syndicated lending?

big banks pull money together to give big loans to companies

What does the MyBank model illustrate about BigTech lending?

The MyBank model illustrates that BigTech lending can rapidly expand by leveraging data for credit risk assessment, offering automated services, and partnering with traditional banks to share funding and risk.

• do not lend to riskier borrowers

• do not suffer from adverse selection

• borrowers repay earlier

• borrowers need ST credits

What is the Buy Now Pay Later (BNPL) scheme?

allows consumers to split purchases into interest-free installments,

• gaining popularity

• providing short-term unsecured credit

• young, low-income, and less-educated individuals to smooth out consumption

How does BigTech credit differ from FinTech credit?

• BigTech credit complementary to traditional bank credit

• FinTech credit substitute traditional bank credit

What are the potential impacts of BigTech companies entering the banking sector?

• increased dominance in the credit market

• greater financial instability

• alter the effects of central banks' interest rate decisions, sometimes making their impact stronger or longer-lasting but slower to manifest.

What key issues must be addressed concerning personal data in the context of BigTech regulation?

• ownership of data

• type of personal data

• importance of privacy

• need international policy coordination because now it is national

What is the difference between activity-based (AB) regulation and entity-based (EB) regulation for BigTechs?

• Activity-based (AB) regulation means setting rules for certain types of activities, no matter who is doing them.

• Entity-based (EB) regulation means setting rules for what one company or organization as a whole is allowed to do.

To properly oversee BigTech companies in financial services, we probably need both types of regulation.

What are the four possible scenarios for the future financial landscape involving BigTechs?

1. traditional finance

2. innovative finance → bigtech supports innovative financial institutions

3. competition between banks and bigtechs

4. bigtech take over→ “super apps” as starting point and forcing bank to transform into narrow banks

what are narrow banks?

taking deposits from prople and provide money to BigTechs without lending

• accepts deposits

• invests those funds only in safe, liquid assets, such as government securities, rather than engaging in riskier activities like lending.

• to preserve capital, ensure liquidity, and minimize credit and market risk, thereby protecting depositors and enhancing financial stability.