The Bank for International Settlements says existing regulatory frameworks need a tune-up to deal with fintechs.
Fintechs, or financial technology firms, can enter the financial sector and then rapidly scale simply by leveraging user data from their existing businesses. In China, for instance, two payment firms, WeChat Pay and Alipay, handle 94%, by transaction value, of the mobile payment market.
The ability of fintechs to quickly amass market share prompts multiple concerns, as the Bank for International Settlements (BIS) noted in its August 2021 bulletin, Regulating Big Techs in Finance.
In addition to traditional challenges, such as the need for consumer protection and oversight of the firm’s operational resilience, big tech’s ability to concentrate market power could lead to closed-loop systems and higher costs in areas like payment infrastructures. Their data governance practices and the potential for abuse are also an area of concern, the report notes.
Moreover, many central banks’ oversight authority is inadequate for addressing these concerns, according to the BIS report. For instance, their designation of “systemically important financial institutions” typically applies only to traditional institutions, like banks.
The current “activity-based” approach to regulation, in which providers hold licenses for specific lines of business, also isn’t well suited to fintechs. Instead, the BIS advocates the addition of entity-based rules—such as the ones already moving forward in several jurisdictions, including the EU, China and the US.