Regulating for Competition with BigTechs: Banking-as-a-Service and “Beyond Banking”

In a recent paper, I analyse ‘banking-as-a-service’ and ‘beyond banking’, two emerging bank competition strategies. These business models are perceived as emulating the transaction-based inroads that BigTechs have made into finance. ‘Banking-as-a-service’ makes it possible for non-banks to ‘provide’ banking services to their customers by drawing on the services of the bank acting in a ‘white-label’ capacity. Banks can thus get looser with respect to transactional sources of business. In turn, ‘beyond banking’ targets a similar goal by organising the provision of banking services jointly with the sale of complementary non-bank products on a sort of platform.

But those strategies entail new risks that call for adequate regulatory responses along a dual track. First, regulation of the disruptive competition model of BigTechs at the confluence of finance and technology requires new tools to coordinate the different regulatory policies involved (banking, payments, competition, data, digital) and a new approach to the treatment of mixed business conglomerates that consolidate multiple business lines and risks. Second, the reliance of ‘banking-as-a-service’ on a quasi-renting-out of the banking licence to non-financial companies as a way of obtaining a transactional base poses moral hazard and model risks that require specific treatment, not unlike the originate-to-distribute business model did. The prospects for success of the pure version of the ‘beyond banking’ model, where banks become sponsors of full-fledged platforms, are assessed as dim, but hybrid versions still entail new risks like diversion of managerial focus by banks or increase in fixed assets.

The reason for the selection of these business models as topics of research from the broader universe of open banking arrangements are threefold. First, they are judged as structural outcomes of the coexistence between banks and BigTechs, leaving aside the rich short-run dynamics surrounding FinTechs. Second, these business models highlight the relevance of the scale and data agglomeration effects typical of digital competition in the BigTech part of the market. Third, they have received little attention despite their specific regulatory challenges.

The analysis of these new emerging business models also lays bare the broader challenges involved in reshaping the regulatory framework for the banking and payment system in the new digital world. The multiplicity of public goals at stake in the BigTech digital space complicates coordination between authorities. In the past competition policy and banking regulation have coordinated implicitly based on top-down processes. But the number and cross-border nature of the authorities involved in the BigTech space renders old methods invalid.

In terms of regulatory challenges, the paper highlights the moral hazard risks of ‘white label banking’. White label banking operates across a broad scope of contractual and regulatory dimensions. Bank customers may be simultaneously customers of the non-financial companies acting as partners of banks. At the same time, BigTechs can also act as IT services providers necessary for the fulfilment of the complete set of a bank’s services. While regulation is dealing increasingly well with these complex relationships, additional efforts will be needed to standardize the corresponding contractual settings.

‘Beyond banking’ is usually seen as a less prominent strategy than ‘banking-as-a-service’, except in countries where geopolitical considerations have spurred domestic initiatives to compete with BigTechs. But it is still a relevant phenomenon when its scope reflects the kind of complementarities surrounding bank finance.

José Ramón Martínez-Resano is an Adviser at the Financial Stability Directorate at the Banco de España.