Big Tech in financial services poses competition and data protection risks: Das

The growing presence of large technology companies, or BigTech, in the financial services space poses competition and data protection risks, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday. The regulator is therefore working on developing an appropriate approach to regulating fintechs, which could be activity-based, entity-based, outcome-based or a mixture of the three, Das said, speaking at the modern BFSI summit from

BigTech (BigTech) companies with a non-financial background that have entered the financial services space could potentially be a source of financial system disruption, the governor said. “As you know, these companies, whether from e-commerce platforms, social media and search engines, carpooling and similar businesses, have started to offer financial services in a big way, on their own or for the account of others,” Das said. . These companies have a huge amount of customer data, which has helped them offer bespoke financial services to entities and individuals with no credit history or collateral.

The governor challenged the tendency of banks and other traditional lenders to use platforms provided by fintech companies in their internal credit risk assessment processes. “Such large-scale use of new credit risk assessment methodologies can create systemic problems such as over-indebtedness, inadequate credit assessment, etc.,” Das said, adding that authorities and regulators will need to find the right balance between enabling innovation and preventing systemic risks. .

BigTechs also pose challenges related to competition, data protection, data sharing and operational resilience of critical services in situations where banks and non-banking financial services (NBFCs) use the services of large enterprises. technologies. These concerns could even materialize in sectors other than financial services, Das said.

“The provision of financial services through the digital channel, including loans through online platforms and mobile applications, has raised issues related to unfair practices, data privacy, documentation, transparency, conduct, violation of licensing terms, etc.” Das said, adding that the RBI will soon issue appropriate guidelines and measures to make the digital lending ecosystem safe and healthy while enhancing customer protection and encouraging innovation.

The regulator’s approach to regulating BigTech is to closely monitor the terms of partnerships between banks, NBFCs and fintechs, as there must be some do’s and don’ts in terms of what regulated entities can and cannot outsource to fintechs.

The central bank does not, at this stage, intend to enact regulations for neobanks. At the same time, he is also not in favor of existing banks launching digital-only banks. “I think there’s no need for a bank to create a separate digital bank, to have some sort of parallel entity in the same business. What they can achieve with a parallel entity, I think they can very well do it in their own organization,” Das said. He said there had been proposals to set up separate digital banks, but the RBI had rejected them.

In November 2021, the Niti Aayog had launched a discussion paper proposing a roadmap for a digital banking licensing and regulation regime in India. The document had caused a stir among major banks, which then devised plans to create their own digital banks to prepare for a likely licensing regime.

While advocating for better risk management by fintechs, Das observed that the RBI does not want to stifle innovation in the early stages of development of an ecosystem like Buy Now, Pay Later (BNPL). “Our job as regulator is to continue to assess what kind of leverage is building in the system and whether it will pose a systemic challenge. We are very clearly monitoring the type of BNPL products offered by key players and what kind of leverage they are accumulating,” Das said, adding, “As needed we will come up with guidelines, but at a very nascent stage we shouldn’t interfere and killing new business methods or models.

Stephen V. Lee