The entry of big tech firms into financial services could increase efficiency and access to credit but also has the potential to generate new risks to the banking sector, according to the Bank for International Settlements.

The international organization known as the central bank for central banks said in its annual economic report that big tech firms have “the potential to spark rapid change in the industry,” with benefits including lowering barriers to financial inclusion for the “large part of the population [that] remains unbanked.”

“Using big data and analysis of the network structure in their established platforms, big techs can assess the riskiness of borrowers, reducing the need for collateral to assure repayment,” the report noted.

But the BIS also warned there could be another side to the coin of ventures by companies such as Facebook, Amazon, and Alibaba into financial services.

“[T]he very features that bring benefits also have the potential to generate new risks and costs associated with market power,” it said, citing the potential for anticompetitive practices that could “favor their own products” to the detriment of established financial institutions.

As The Guardian reports, the warning from the BIS comes only days after Facebook announced it would launch a digital currency, Libra, in 2020.

Those expressing concerns about Facebook’s move include Chris Hughes, a co-founder of the social media giant, who said that “If even modestly successful, Libra would hand over much of the control of monetary policy from central banks to these private companies.”

The BIS said big tech could promote financial inclusion by tapping different but relevant information about loan applicants through their digital platforms. “For example, [Alibaba’s] Ant Financial and Mercado Libre claim that their credit quality assessment and granting of loans typically involve more more than 1,000 data series per loan applicant,” it noted.

But big tech firms could also “use their data not only to assess a potential borrower’s creditworthiness, but also to identify the highest rate the borrower would be willing to pay for a loan or the highest premium a client would pay for insurance.”

, , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *