Title Page
FINTECH NOTES
BigTech in Financial Services: Regulatory Approaches and Architecture
Parma Bains, Nobuyasu Sugimoto, and Christopher Wilson
NOTE/2022/002
Title Page
FINTECH NOTE
BigTech in Financial Services: Regulatory Approaches and Architecture
Prepared by Parma Bains, Nobuyasu Sugimoto, and Christopher Wilson
January 2022
Copyright Page
©2022 International Monetary Fund
BigTech in Financial Services: Regulatory Approaches and Architecture
Note 2022/002
Prepared by Parma Bains, Nobuyasu Sugimoto, and Christopher Wilson
Names: Bains, Parma, author. | Sugimoto, Nobuyasu, author. | Wilson, Christopher (Christopher Lindsay), author. | International Monetary Fund, publisher.
Title: BigTech in financial services : regulatory approaches and architecture / prepared by Parma Bains, Nobuyasu Sugimoto, and Christopher Wilson.
Other titles: Regulatory approaches and architecture. | FinTech notes (International Monetary Fund).
Description: Washington, DC : International Monetary Fund, 2022. | January 2022. | Note 2022/002 | Fintech notes. | Includes bibliographical references.
Identifiers: ISBN 9781557756756 (paper)
Subjects: LCSH: Financial services industry -- Law and legislation. | Financial services industry -- Technological innovations. | Finance -- Technological innovations. | Banks and banking -- Information technology.
Classification: LCC K1397.F56 B35 2022
Fintech Notes offer practical advice from IMF staff members to policymakers on important issues. The views expressed in Fintech Notes are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Abstract1
BigTech firms are gradually entering the financial sector and becoming important service providers, particularly in emerging markets. BigTechs have entered financial services using platform-based technology to facilitate payments and more recently expanded into other areas, such as lending, asset management, and insurance services. They accumulate data from their nonfinancial and financial activities and draw on consumer data held in different parts of their business (such as via social media). BigTechs are applying new approaches to existing financial services products and services such as underwriting using big data and are also applying machine learning for their key business decisions, such as pricing and risk management across multiple financial sectors. Incumbent financial firms have also increased their reliance on BigTech firms to host core IT systems (for example, cloud-based services, which have the potential to improve efficiency and security). This rapid and significant expansion of BigTechs in financial services and their interconnectedness with financial service firms are potentially creating new channels of systemic risks.
To achieve effective implementation and multiple objectives of financial regulation and supervision, a hybrid approach, combining a mix of entity- and activity-based approaches, is needed. Home supervisors should establish an entity-based approach to cover the global activities of a BigTech group, while host supervisors could in principle address local risks and concerns mainly through activity-based regulations. Cross-sector and cross-border cooperation are key in determining the future of the regulatory architecture. However, it can take several years before regulators have achieved a sufficiently robust legal and regulatory framework to address all risks arising from BigTech in financial services, and short-term solutions may be needed. In the interim, regulatory authorities should actively use all existing regulatory powers to manage risks, while BigTech should adopt and improve governance frameworks through industry codes of conduct and enhanced disclosures. Options should be explored to promote global consistency in the treatment of BigTechs, through existing or new global bodies with a broad mandate. We recommend that the 2012 Principles for the Supervision of Financial Conglomerates be reviewed to address regulatory gaps.
Contents
Abstract
I. Executive Summary
II. BigTech in Financial Services—Key Elements
Reversing the Unbundling—Faster, Higher, Stronger
Interconnectedness
Concentration of Cloud Services
III. Key Considerations in Regulatory Approaches
The Existing Regulatory Frameworks and BigTechs
IV. Regulating BigTechs—Now and Later
Implications for Regulatory Architecture
Potential Regulatory Approaches
Key Challenges along the Way
V. Conclusion
VI. Annex 1: Definitions
VII. References
Box 1. Different Trends of BigTech Expansion into Financial Services
Box 2. Disclosure of BigTech Financial Services
Box 3. Case Studies of Current Entity- and Activity-Based Regulatory Approaches to BigTech
Table 1. Key Risks of BigTech
Figure 1. Short, Medium, and Long Term Regulatory Frameworks
