Open Banking may lead to BigTech’s dominance of an unstable financial services industry

By Roger Baird on Wednesday 27 February 2019

Digital Banking

The Financial Stability Board says banks have more to fear from BigTech rather than fintech.

The first two months of the year has seen the launch of a raft of Open Banking ventures, designed to free up financial services for consumers. But global regulator, the Financial Stability Board (FSB), is concerned that Open Banking might be used by BigTech to dominated parts of the industry and threaten financial stability.

The FSB, which comprises regulators and central bankers from the G20 economies, said that inroads made into financial services by huge players such as China’s Alibaba and Google and Amazon in America offer a greater threat to the global financial system, than the plethora of smaller fintech firms that have launched around the world in recent years.

“‘BigTech, could materially alter the universe of financial services providers,” said the FSB in a report earlier this month. “This could in turn affect the degree of concentration and contestability in financial services, with both potential benefits and risks for financial stability.”

The FSB added that Open Banking might be used as the route by which BigTech gains a foothold in the industry.

A change in European Union law at the start of the year has ushered in Open Banking, which means consumers can allow businesses, other than their bank, to access their financial data.

Destructive trends

In the first few weeks of the year, this has led to the announcement of a raft of partnerships allowing banks, fintechs and other financial institutions to share products and services with their customers.

The aim of these changes, which operate using Payment Services Directive and application programming interface rules, is to allow customers to get better deals, such as cheaper overdrafts, and speed up switching between banks.

But the FSB added that Open Banking may also accelerate destructive trends in the industry.  

It said: “The raft of new technologies introduced in the past few years, and the impetus provided by Open Banking could also change the dynamics of competition quickly.”

The global regulator is sanguine about the recent rise of fintech firms, which have made inroads into global credit provision and payment networks. But it adds that these firms have generally not had sufficient access to cheap money or a big enough customer base to pose a serious competitive threat to banks.

However, it adds that the “competitive impact of BigTech may be greater than that of fintech firms”. This is because giants such as Amazon have customer bases counted in the tens of millions, strong brand recognition, deep pockets and access to low cost capital from investors.

Banks under pressure

The diverse nature of these large companies mean that cross-subsidisation allows these firms “to operate with lower margins and gain greater market share”.

Heightened competition could put profits at financial institutions under pressure, which may lead to hazardous risk taking to maintain margins, resulting in unstable financial markets.

Banks are certainly feeling the pressure, simply to upgrade their networks, that is being put on them by both fintechs and BigTech.

“The absence of the cost drag of legacy IT systems and underused branch networks, which have been seen as a kind of public service and are therefore hard to rationalise, allow for cheaper digital delivery mechanisms which banks can only envy,” wrote chairman of the Royal Bank of Scotland Howard Davies in Financial News this week.

Davies added: “Banks in Europe are not much in favour with investors today, trading well below book value in most cases, and a significant loss of market share in payment services would threaten their viability further.”

Trojan Horse

By contrast the the FSB report points to the strength of e-commerce conglomerate Alibaba, which founded subsidiary Ant Financial in 2014, which provides such services as mobile payments, small business loans and wealth management products.  It already has 170 million customers and holds 1.5trn yuan in assets.

Online giant Amazon was reported to have held talks with investment bank JPMorgan Chase to develop a personal account product, last March. This would not be the firm’s first foray into the financial services sector. It has become a major player in online lending to small businesses, announcing in summer 2016 that it had originated $3bn in loans since launching the service in 2011.

The FSB says the current financial landscape is not currently at risk from these potential developments, but offers no magic bullet to financial regulators around the world, simply calling on them for “vigilance”.

It adds that supervisors should pay attention to “monitoring the impact of heightened competition on profitability and lending standards, as well as increasing cyber risk.”

The FSB has laid out a convincing scenario in which Open Banking becomes a Trojan Horse for BigTech dominance of financial services.

Sign up for our newsletters

Your daily 7am download of all things alternative finance and fintech.

Fintech and alternative finance headlines with an exclusive Editor's Note each week. Delivered Monday at midday.

AltFi's new weekly US newsletter breaking down the ins and outs of America's burgeoning fintech sector. Delivered Monday 9am EST/ 6am PST.