Reserve Bank flags bigtech risks to financial stability

Source: The post is based on the article “Reserve Bank flags bigtech risks to financial stability” published in Economic Times on 19th October 2022.

What is the News?

According to a report by the 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, widespread use by financial institutions and network effects.

What are Big Techs?

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.

What are the risks by Bigtech firms to financial stability?

Firstly, the complex governance structure of big techs limits the scope for effective oversight and entity-based regulations.

Secondly, Big techs can impact the risk and maturity transformation functions through their direct exposure to the provision of financial services. This may sometimes translate or lead to shadow banking activities, undermining financial stability.

Thirdly, Bigtechs are a barrier in creating a level playing field to promote innovation in the fintech space.

Fourthly, Bigtechs 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. This can be exploited for generating innovative product offerings, making them dominant players in the market.

Lastly, besides the technological advantages, the big techs typically also have the financial muscle to withstand competitive pressures.

What are the steps taken by India against this?

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.