The Rise of Big Tech Has Significant Implications for Global Financial Regulation

Big technology (Big Tech) firms—globally active digital platforms or tech companies—generate extensive user data that allow them to engage in a variety of businesses, including financial services and products. While often discussed as part of the broader financial technology movement disrupting the financial sector (FinTech), Big Tech firms are unique because of their ability to control customer access points such as search engines, app stores and mobile operating systems. As we discuss in our recent paper, these distinctive features have important implications for global financial regulation.

First, the size and complexity of Big Tech firms challenge approaches to regulating entry into financial markets. These firms enter either on their own, requiring them to obtain a license to operate or through a joint venture with, or investment in, an established financial institution. Both of these entry mechanisms can make it hard to identify the product, service, or entity that should be regulated or otherwise supervised. For instance, Apple’s decision to enter the buy-now-pay-later services market in the US in early 2023 creates an interesting partnership dynamic between Apple and financial institutions MasterCard and Goldman Sachs, which will collaborate to make the service possible.

Second, the firms raise concerns about market conduct. Their dominance in data collection and control creates the potential for data monopolization and consumer discrimination. As partners with financial firms, they may contribute to confusion over who to hold accountable for breaches and failures in financial product and service offerings.

Each of these issues is particularly acute in the fields of payment services and cloud services. The provision of payment services by Big Tech firms can shift that service outside the traditionally regulated sector. The provision of payment services offers Big Tech’s entry into the broader financial service markets, such as credit lending. Big Tech firms are also traditional financial actors’ most significant cloud service providers. This raises the potential for conflicts of interest and complicates the regulation of banks and Big Tech firms whose product and service offerings become increasingly intertwined.

We identify four main challenges for regulating Big Tech:

Operational Risks: Big Tech firms offer significant payment services to existing financial institutions. Due to the concentrated nature of these services, an outage can disrupt payment systems. Further, the concentration of market power in these firms heightens the importance of addressing the potential monopolistic use of data, price discrimination, algorithmic biases, misuse of market power, and the infringement of personal privacy.

Changing the Contemporary Understanding of the Nature of Finance: Big Tech firms operate as large global technology firms rather than exclusively in the financial sector. Financial regulators are, therefore, faced with novel challenges because they may not have the expertise and resources to oversee these firms.

Negative Externalities: The entry of Big Tech firms into the financial ecosystem exacerbates problems associated with the complexity and opacity of dealing with massive institutions whose failure would result in difficult-to-predict negative externalities. New connections with too-big-to-fail firms mean that, while they increasingly become too big to ignore from a financial regulatory perspective, they may also be too complex to comprehend.

Systemic Financial Stability Concerns: The above challenges create additional threats to a core post-financial crisis regulatory aim—the maintenance of systemic financial stability. Financial regulatory frameworks have not been created with the interdependencies of technology firms in mind, creating new regulatory blind spots. The global reach of Big Tech firms creates a problem that current regulatory settings fail to tackle.

We find that the current mechanisms for addressing concerns such as systemic risk and promoting sustainable development are ill-suited to the challenges raised by Big Tech.

Further, the diverse and complex nature of product and service offerings provided by Big Tech firms places a premium on regulatory coordination. Jurisdictions will increasingly find it necessary to facilitate coordination among various regulators traditionally considered on the periphery of financial regulation.

Finally, some Big Tech firms can operate as de facto financial market infrastructures. They may, for instance, offer payment systems that other institutions can leverage for their service offerings. Operational failures in these firms could have a wider systemic effect. The post-crisis regulatory framework employed macroprudential policy to enhance capital buffers to address systemic risk. However, this form of regulation may not be best suited to address the systemic risks Big Tech firms pose as these policies do not address the broad activities undertaken by these firms. In our paper, we offer a regulatory and supervisory approach to these challenges.

First, we argue that systemic financial stability and sustainable development should underpin all financial activity, including that of Big Tech firms, and should be the lens through which we view the achievement of other goals such as innovation, competition and economic growth. To account for the growing influence of Big Tech on finance, we suggest that data protection and interoperability be treated alongside systemic financial stability and sustainable development aims as goals underpinning the financial ecosystem.

Second, we propose that jurisdictions combine entity-specific financial regulation and supervision approaches with activity- or function-based approaches. Regulation and supervision should incorporate all relevant stakeholders, provide them with the powers necessary to effectively and efficiently carry out their functions, and present scenarios to help regulators and supervisors react to emerging challenges. The use of technology by supervisors (SupTech) is particularly important in providing solutions that help regulators and supervisors manage the overwhelming amounts of data generated through technological innovation in the financial sector.

The complex and ever-changing nature of Big Tech firms also requires that there be tiered approaches to licensing. The licensing regime should be tailored to particular circumstances of specific Big Tech operators, which requires a degree of flexibility.

Finally, our paper calls for a more comprehensive and explicit integration of global standards within the financial governance framework. This could include extending financial governance principles to cover data governance as a subset of standards and formally integrating into the global oversight process standards that would be specific to Big Tech.

Steve Kourabas is a Lecturer at Monash University Faculty of Law.

Cheng-Yun (CY) Tsang is an Associate Professor at Monash University Faculty of Law.

This post has previously appeared on the CLS Blue Sky Blog and can be accessed here.