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Big Tech in Banking

Authored by Kanishka Agrawal, Student at HNLU, Raipur

Introduction

After the 2008 Global Financial Crisis, the banking sector has experienced a phenomenal technological transformation. Information technology (hereinafter referred to as ‘IT’) and Fintech[1] companies have fundamentally transformed the financial landscape of the world[2] in numerous ways, they have contributed to the modern banking sector by providing basic banking services through cost reduction, improved customer services, and financial inclusion.

The online revolution in the late 20th century connected the globe through Internet while the 21st century witnessed the rise of smart technology which put forth the powerful technologically advanced computers in human palms spurring digitisation. The availability of big and unconventional datasets has enabled Artificial intelligence (A.I.) that provides accurate predictions and personalises banking services.[3]

People are now increasingly changing their preferences towards digital services and the I.T. is regarded as the fifth industrial revolution that is fuelling such growth. “The Big Tech or the Tech Giants are the dominant I.T. companies that have emerged due to technological development.” Their gradual entry into the banking sector through the use of financial technology has created a diverse impact in the financial sector, as they enjoy certain privileges, in contrast to the banks, which aid their growth. Their huge customer base, the technical advancements, and the tremendous commercial and private data collected during previous commercial activities have placed them in an advantageous position.

In this article, we will in detail look after the growth of these Big Tech companies, and how data put them in such an advantageous position, along with that we will take a closer look at what privacy-related challenges are faced by the banks, and how such issues could be regulated.

 Big Tech Companies: An overview

The Big four, Google, Amazon, Facebook, Apple are among the pioneer of the Big Tech companies.[4] They are the most dominant I.T. companies in the contemporary world because of their technology, quality of understanding markets, and the ability to ensure customer satisfaction. Their products and services are consumed globally and they have changed the way businesses and individuals use technology in their daily lives. “These companies are also known as the non-financial technological companies or the TechFin, which have extended their digital ecosystem to offer certain banking services to enter the financial sector.” Such banking services include lending, insurance, asset management, bill payment, peer-to-peer transactions, etc.

Why Big Tech are in advantageous position?

Big Tech giants are in a much-privileged position as compared to the contemporary banks, as over the years, the Big Tech companies have shown positive growth, by capturing markets like never before. Digital platforms benefit from “direct network effects,” which means the more clients in their networks, the simpler it becomes to recruit. Howsoever, their already established massive networks with customers enable unconstrained access to the market. In addition to the capital, established reputations, powerful brands, they possess technology and machine learning capabilities, making it easier for them to adopt Fintech innovations compared to banks. These Tech giants provide an easier and more efficient way of using certain financial services like peer-to-peer transactions, bill payments, mobile recharges, and online payment. “Amazon is one such multinational I.T. company that is not only an online marketplace that sells books, electronics, toys, and many other goods but also provides various other services through its platforms for online payments Amazon Pay and  music and video streaming Amazon Prime.” So, a consumer can simply purchase goods from the Amazon website and pay for them through Amazon Pay Wallet.

In a world driven by Data, the collection, aggregation, and exploitation of data about user’s experiences are characterised by the interconnection of devices and technology that maximise the value of network effects in terms of competitive advantage. Therefore, to attract more customers, the collection of Data remains the most significant goal of these Big Tech companies.

Data: An important Asset for the Big Tech

Nowadays, everyone is in constant touch with the screen, either being, smartphones, tablets, or personal computers, they heavily use various online facilities for several services, buying tickets, ordering meals, or paying for almost all the daily activities, leaving a huge amount of data on digital platforms. As online services are easily accessible, people now prefer to use e-commerce sites to avail themselves of services like taxi-hailing, room booking, travelling, money lending, online academic courses, fellowships, distance learning, etc. “Massive user data including identity data, network data, behavioural data, monetisation preferences, etc., are collected from such services. Apart from these, social media acts as a huge data pool that collects information about the user’s interests and various behavioural preferences.

A computer algorithm integrates these unequal pieces either from various service lines on the same platform or third-party data providers in the other industries, these algorithms identify correlations that people cannot, and hence the potential of user data integration grew exponentially.[5] These tech giants then employ big data analysis to give users more fast and personalised services, by targeting potential customers. Hence, big data is a critical resource for the implementation of A.I. and other data-driven technologies.[6]

Tech Giants considers data as a worthwhile investment because it yields substantial financial returns. They rely on the virtuous cycle of data; the more data they collect, the better understanding they have of the customer’s need and preferences, which attracts more customers. Banks, on the other hand, see data as a bulk to be managed and didn’t its value. They generally use only a small portion of such Data to get insights, and the major portion is sprawled across the organisations in marketing, fraud, and credit risk silos. They don’t use this data efficiently to provide personalised experiences, which could attract more customers.

Challenges For Banks

Banks earn revenue not only from their balance sheet but also from activities that do not show up on their balance sheets. A typical large bank may be thought of carrying a collection of operations. The majority of these operations is or could be performed by non-banking institution, hence banks had to compete with such institutions. Whereas, banks are fragile and prone to the potential systemic risk of failures. They have to take steps that ensure that their customers are not using their services to launder money. To ensure the customer’s trust, it becomes necessary to ensure those deposit accounts offered by banks are safe liquid claims that are instantly redeemable, hence, regulation becomes necessary.[7]

Regulation of banks ensures that they have good management and are not involved in bad investments. Although regulation provides a sense of trust and security to customers, it becomes very expensive and increases banks operating costs. Banks are further subject to capital requirements to recover unexpected losses. Such requirements are not necessary for the activities carried outside of banks. TechFin is neither subject to such capital requirement nor do they need to follow the same regulations as those of banks which enables them to offer cheaper and personalised financial services at their autonomy.

Apart from regulation, the other significant challenge that limits banks’ ability to compete with Big Tech companies, is, the integration of FinTech innovation into Banking systems. Large banks are massive, diverse financial multinationals with internal conflicts of interest that have been shown to reduce efficiency, forcing them to rely on laws and organisational procedures that make them inflexible. [8]

Regulation and Privacy Issues

Rapid developing financial technology changed the market structures of financial services. Such developments, on one hand, enhance new business models and create new opportunities, but on the other hand, it attracts new risks. The lack of regulation makes it difficult for the Big Tech companies to become successful in offering banking services as regulation and supervision have always been pivotal in the development of the banking business to protect customer’s systemic stability and solvency.

As Big Tech companies gather, analyse, collect data, enjoy a large customer network and various brand recognition, along with this they attract the potential risk for exploitation of data analytics in banking, which confronts policymakers due to increasing numerous significant hurdles. The ability to combine financial and non-financial statistics exposes the banking industry to non-typical difficulties since data forms the foundation of a Tech firm’s business models. The customer’s Data risk has increased considerably as financial services become more digital, various combination of datasets raises concerns about the merging of sensitive traits such as ethnicity, religion, or gender in automated fiscal operations.[9]

If we talk about the present legal framework for data in India, there is no comprehensive and dedicated legislation specifically about Big data. However, there was a recent amendment in the Information Technology Act, 2000 to incorporate rules for the protection of personal data[10]. Also, Parliament has recently introduced the Data Protection Bill which is under the consideration of the Joint Parliamentary Committee. It doesn’t specifically contain any provisions relating to Big Data, but it is expected to regulate Big Data activities. These legislation however confer vast powers on the Central government who can exempt any government agency from processing data as per the requirements.[11]

As Big tech companies also pose a threat to other smaller I.T. companies, The Competition Act, 2002, seeks to prevent any adverse effect on competition through its provision of the Anti-Competitive Agreement mentioned under Section 3 of the Act. [12]

Way Forward

The pace of financial activities will increase rapidly in the future; with various banking accounts on digital platforms, the everyday banking experience became entirely virtual. It is foreseen that there would be increasing use of A.I. and Blockchain technology in the future, as this will improve the banking efficiency, and will reduce friction between customers and the service providers. But, it could also lead to potential systemic instability with a large amount of data being dealt with by the system.

To minimize such negative externalities of the system, it is crucial to understand how rules and regulations should be correctly framed for such developments. Also, traditional banks should activate their competitive differentiation strategies to adjust their mindset and focus on digital transformation.

References

[1]Financial Stability Board, Monitoring of Fintech (June, 2017).

[2]Reserve Bank of India, RBI Bulletin- FinTech: The Force of Creative Disruption, (Nov 11, 2020).

[3]Ibid.

[4]Chris Alcantara, Kevin Schaul, Gerrit De Vynck & Reed Albergotti, How Big Tech got so big:
Hundreds of acquisitions
(May 22, 2021, The Washington Post.

[5]Winston Ma, Breaking the Big Tech Monopoly: The Coming Decade of Big Tech Regulations, Horizons J.I.R.S.D, 166-179 (2021).

[6]Ibid.

[7]René M. Stulz, FinTech, BigTech, and the Future of Banks, J. A. C. F., Vol. 31, p. 87,  (2019).

[8]Ibid.

[9]Nicola Bilotta & Simone Romano, Tech Giants in Banking: The Implications of a New Market Power, IAI Vol 1, p. 1-10 (2019).

[10]Malvika Kapila Kalra, Intermediary Liability under the Information Technology Act: Time for an Amendment?, Bar And Bench, May 22, 2021.

[11]Yogesh Pratap Singh, Plug loopholes in Personal Data Protection Bill, The New Indian Express, May 22, 2021.

[12]The Competition Act § 3 No. 12 of 2003, (2002).

Edited By: Amey Jadhav

*Disclaimer: The content of this article is intended to provide a piece of general information. The views are expressed by the Author solely and BFTLR may or may not subscribe to the views of the Author.

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