Digital Platforms: A New Source of Financial System Interconnectedness

Financial institutions are increasingly relying on digital platforms as a means to market and distribute their products and services to customers, in line with the broader trend towards the digitisation of the financial sector.

The use of digital platforms offers opportunities for both financial institutions and customers. For example, the use of digital platforms can:

• facilitate business model transformation and reduce costs;
• provide greater proximity to existing and new customers;
• enable network effects to be leveraged, including across financial and non-financial business lines;
• improve access to financial services, including on a 24/7 and cross-border basis. 

However, digital platform use is not without risk. For example, use can elevate operational risks, notably information and communication technology (ICT) risks, and generate reputational risk, notably due to the interaction between regulated and unregulated firms. It can also pose new challenges for, and risks to, consumers (for example, in the event of poor quality disclosures about product features, the relevant contracting party, data access and use, and complaints and redress arrangements).

Importantly, as financial institutions gravitate towards specific digital platforms (notably the BigTech ‘Pays’) new forms of concentration and potential contagion risk can also arise. However, as set out in the European Banking Authority’s (EBA) September 2021 Report on the use of digital platforms in the EU banking and payments sector, supervisory authorities currently lack visibility (at both a micro- and macro-level) over digital platform use, particularly in the context of interdependencies on firms outside the perimeter of direct supervision. Over time, this imperfect understanding of business models could impair the effective monitoring of specific risks, including those arising from financial, operational and reputational interdependencies between financial institutions and technology companies.

To address this issue, the EBA proposes some steps to improve supervisors’ understanding of platform-based business models, including by:

• developing common questionnaires for regulated financial institutions on digital platform use;
• facilitating the sharing of information about financial institutions’ reliance on digital platforms in order to enhance EU-wide monitoring.

Further steps are also under consideration, including a proposal to establish indicators that could help supervisors and other relevant authorities in assessing potential concentration, contagion and future systematic risks, with joint European Supervisory Authority (ESA) advice to be expected in January 2022 following the European Commission’s February 2021 Call for Advice on digital finance.

The report comes at a time when the European Commission is already acting on concerns about potential competition issues arising from so-called gatekeeper platforms (see the legislative proposals for the Digital Services and Digital Markets Acts) and international bodies, such as the Bank for International Settlements and Financial Stability Board, are increasingly considering the impact of FinTech and BigTech on  the structure of the financial sector. The topic can be expected to be high on policymakers’ agenda for some time.

Elisabeth Noble is a Senior Policy Expert at the European Banking Authority.

The views expressed in this blog are the author’s alone and should not be taken to represent those of the European Banking Authority (EBA) or to state EBA policy. Neither the EBA nor any person acting on its behalf may be held responsible for the use to which information contained in this publication may be put, or for any errors which, despite careful preparation and checking, may appear.