Report by RBI on Big Techs | 19 Oct 2022

Why in News?

According to a new report by Reserve Bank of India (RBI), large non-financial technology firms, referred to as “big techs,” pose challenges to financial stability owing to their technological advantages, large user base, wide-spread use by financial institutions and network-effects.

What are the Big Techs?

• About:
  • Big techs include companies such as Alibaba, Amazon, Facebook, Google, and Tencent.
  • They usually hold service licenses through subsidiaries or Joint Ventures with varying levels of ownership control and jurisdictional regulatory advantages.
• Increasing Role of Big Techs:
  • Big techs, given their pervasive adoption as third-party service providers, generally become the underlying platform on which a host of services are offered.
    • This uniquely positions the big techs to easily acquire cross-functional databases which can be exploited for generating innovative product offerings, making them dominant players in the market.
  • The pervasiveness of big techs provides them with a large client base who are entrenched in using their platforms/ products with access to multiple facets of customers’ data, generating strong network effects.
  • The entry of big techs into finance also reflects strong complementarities between financial services and their core non-financial services.
  • Besides the technological advantages, the big techs typically also have the financial muscle to withstand the competitive pressures.
• Related Steps taken by India:
  • In India, efforts have been made for local storage of payment data and to bring critical payment intermediaries into the formal framework.
  • Initiatives are also underway to increase the payment acceptance infrastructure and create a data protection law.

What are the Risks associated with the Big Tech Sector in Financial Services?

• Complex Governance Structure:
  • The complex governance structure of big techs limits the scope for effective oversight and entity-based regulations.
    • Due to the adoption of big techs as third-party service providers, they have become the underlying platform on which a host of services are offered.
• Barriers in Creating Level Playing Field:
  • Big Techs are a barrier in creating a level playing field to promote innovation in the fintech space.
• Data Privacy Issues:
  • There is a lack of transparency in how tech companies process user data, which has raised serious and pressing privacy concerns.

What are the Suggestions?

• Realign Framework to Facilitate a Level Playing Field:
  • To facilitate fairness in the fintech space, regulators are realigning their regulatory frameworks while managing the possible risks posed by bigtechs.
• Need to Keep up the Pace with Innovations:
  • With the increasingly complex inter-linkages between financial institutions and tech-companies, the regulatory frameworks need to keep up the pace with innovations to contain the vulnerabilities that may arise from the new risk propagation channels.
• Mindful of the New Linkages:
  • The regulations in EMDEs (Emerging Markets and Developing Economies) need to be mindful of the new inter-linkages that bigtechs might create with the existing financial institutions.

Source: ET