BigTech in Financial Services

BigTech firms are gradually entering the financial sector and becoming important service providers, particularly in emerging markets. BigTechs have entered financial services using platform-based technology to facilitate payments and more recently expanded into other areas, such as lending, asset management, and insurance services. They accumulate data from their nonfinancial and financial activities and draw on consumer data held in different parts of their business (such as via social media). BigTechs are applying new approaches to existing financial services products and services such as underwriting using big data and are also applying machine learning for their key business decisions, such as pricing and risk management across multiple financial sectors. Incumbent financial firms have also increased their reliance on BigTech firms to host core IT systems (for example, cloud-based services, which have the potential to improve efficiency and security). This rapid and significant expansion of BigTechs in financial services and their interconnectedness with financial service firms are potentially creating new channels of systemic risks. To achieve effective implementation and multiple objectives of financial regulation and supervision, a hybrid approach, combining a mix of entity- and activity-based approaches, is needed. Home supervisors should establish an entity-based approach to cover the global activities of a BigTech group, while host supervisors could in principle address local risks and concerns mainly through activity-based regulations. Cross-sector and cross-border cooperation are key in determining the future of the regulatory architecture. However, it can take several years before regulators have achieved a sufficiently robust legal and regulatory framework to address all risks arising from BigTech in financial services, and short-term solutions may be needed. In the interim, regulatory authorities should actively use all existing regulatory powers to manage risks, while BigTech should adopt and improve governance frameworks through industry codes of conduct and enhanced disclosures. Options should be explored to promote global consistency in the treatment of BigTechs, through existing or new global bodies with a broad mandate. We recommend that the 2012 Principles for the Supervision of Financial Conglomerates be reviewed to address regulatory gaps. 2012 Principles for the Supervision of Financial Conglomerates be reviewed to address regulatory gaps and mitigate new risks (including systemic risk) arising from conglomerates, such as BigTech groups. The IMF can help in facilitating the global dialogue, sharing information, reviewing existing international standards, and implementing new standards.