The Pros and Cons of Big Tech Banking

A FinReg blog post based on a paper published in the Journal of Competition Law and Economics by Jorge Padilla and Miguel de la Mano.

The entry of Big Tech players, such as Google, Facebook, and Amazon into online banking will fundamentally alter retail banking’s competitive landscape. Big Tech platforms have large, installed customer bases, established reputations, powerful brands, considerable earnings and unfettered access to capital markets. They can potentially leverage superior information on consumer preferences, habits and conduct; influence the shopping experiences of many consumers, and shape the distribution and commercialization of their suppliers.

Big Tech platforms are well-equipped to utilize the explosion in big data; advances in artificial intelligence, computing power, and cryptography; and the reach of the Internet. These technologies enable new financial applications around payments, financing, asset management, and insurance.

The impact of Big Tech on retail banking has already been felt in Asia. For example, China’s most prominent online commerce company, Alibaba, launched in 1999 and started Taobao in 2003 as a consumer e-commerce platform. In 2004 they added Alipay as a third-party online payment platform. Since then, Alipay (renamed Ant Financial in 2014) has played a vital role in Alibaba’s success and has built its standalone presence with a wide range of financial offerings, including payments, wealth management, lending, insurance, and credit scoring.

In a recent paper published in the Journal of Competition Law and Economics, Jorge Padilla (Senior Managing Director of Compass Lexecon EMEA) and Miguel de la Mano (Executive Vice President, Compass Lexecon) explain why the entry of Big Tech platforms will transform the retail banking industry in radical ways. While it may increase competition to the benefit of consumers, it may also eventually lead to a diminution in competition for the origination and distribution of loans to consumers and SMEs, forcing traditional banks to become “low-cost manufacturers” that merely fund the loans intermediated by the Big Techs. This may ultimately harm competition, reduce consumer welfare, and bring about an increase in financial instability.

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