A research on the involvement of big technologies in financial services published by the Financial Stability Institute – Financial Services

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On July 5, 2022, the Financial Stability Institute released a research report on the role of big tech companies in the financial industry (the “Report”).1The report assesses the interdependencies in the business models of selected large technology companies based on publicly available information and outlines the regulatory and risk implications of how these companies provide and support financial services. Financial institutions and tech companies should revisit its recommendations in light of regulators’ increased emphasis on oversight of third-party service providers.2

The report describes how some major tech companies operate online platforms where users can purchase products and services or perform contracts. The technology company can be the user’s counterparty, find counterparties for users (e.g. sole traders), or partner with counterparties.

Typically, the core business of a large technology company is to engage in e-commerce and provide digital and other related services. However, some large technology companies also typically provide payment services to facilitate e-commerce and digital transactions and technology services to support their own or others’ business activities (eg, cloud computing services).

Through the exploitation of these platforms, large technology companies are creating ecosystems that encourage users to engage and use multiple services. Also, large tech companies typically collect user information throughout the process, and using multiple services multiplies the amount of information that can be collected. The need to maintain and grow this network effect drives large technology companies to continuously expand their core and branch business into new markets and businesses.

The report identifies common payment and technology infrastructures as key dependencies within large technology companies. In particular, he notes that large tech companies often operate easy-to-use and important proprietary payment systems to connect different businesses. Other key dependencies noted in the report include the collection and sharing of user data between companies and the use of sophisticated proprietary credit scoring systems.

The report explores the connection between big tech companies and financial institutions, explaining that financial institutions can significantly rely on technology services provided by big tech companies. He notes: “While this reliance may increase the resilience of individual financial institutions and could be profitable for smaller ones, it would exacerbate system-wide operational and concentration risks in
[cases where] big tech was bound to experience significant disruption.”

The report also indicates that major tech companies are partnering with financial institutions to expand into new markets and facilitate cross-border payments. This can be done through white label or bank-as-a-service agreements that leverage the big tech company’s brand and global platform.

The report highlights the critical role that big tech companies play as service providers to financial institutions and indicates that this reliance is likely to increase in the future. In light of this growing critical role, the report’s authors fear that big tech companies are becoming “single points of failure” and creating “new forms of concentration risk” for financial institutions. They suggest that one factor in mitigating this risk to financial stability could be for large tech companies to “implement the best operational resilience and cybersecurity frameworks.” They also suggest the development of entity-specific regulations for large technology companies that operate in the financial sector. They believe that these regulations (including risk assessments) should be applied to large technology companies at the group level and across borders, which is similar to how the banking sector is currently regulated.

The report does not seek comment or propose any specific action, but is worth reading by those responsible for risk management in the financial services and fintech industries. Financial regulators remain focused on the operational resilience of financial institutions and regularly scrutinize technology companies that provide core services to financial institutions. This is another trend that is likely to increase over time and will require increased coordination between these vital sectors of the global economy.

Footnotes

1 ISP, Big Tech Interdependencies (July 5, 2022), https://www.bis.org/fsi/publ/insights44.htm.

2 See our Legal Update on new breach notification requirements for US bank service providers: https://www.mayerbrown.com/en/perspectives-events/publications/2021/11/breach-notification-requirement -finalized-by-us -banking-regulators.

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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.

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