The tech giants, or Big Tech, have transformed people’s lives, not only in how we interact socially but also in how we consume and spend. Big Tech platforms allow us to search the internet, connect through social media, shop online, and much more. Many of these activities entail financial transactions, creating risks that, in the case of banks, have historically warranted applying regulation. But not so in the case of Big Tech.

In addition, these firms not only provide people with access to financial services; they also perform tech services for the banks themselves. So, what new risks does Big Tech in finance pose to users and global stability? What might be the best regulatory response to mitigate these risks? And why is there talk of expanding the 'regulatory perimeter'?

The Big Tech boom

Technological innovation has revolutionised the financial system over the past decade. Today, mobile phones can be used to transfer money and make payments, even in instalments, because users’ personal and banking data are stored on online platforms. Much of this progress has been possible because of Big Tech firms like Google, Amazon and Xiaomi.

Big Tech entered finance in the early 2010s with the aim of capturing more business areas within their users’ life online, and its ability to provide these services flexibly paved the way for the sector’s swift expansion in finance.

The tech giants initially focused on offering alternatives for e-payments, and obtained very good results in African and Asian countries which had outdated payment systems but where use of mobile phones was widespread. Following this success, they widened their range of services exponentially, including in advanced economies, and ventured into lending transactions and operations with cryptocurrencies.

The pioneers here were the Big Tech firms from China, which were joined by US firms in 2017. Figure 1 gives an idea of how the services available have expanded and diversified in the past six years alone.

Figure 1
SOME RECENT BIG TECH INITIATIVES IN FINANCIAL SERVICES

SOURCE: Banco de España and Financial Stability Institute (FSI).
NOTE: Click on (+) to access more information on the respective initiatives.

These new players have expanded very quickly, and their growth potential is enormous. In 2023, lending by Big Tech in China increased by a rate of 35% year-on-year, compared with just 6% in the case of bank credit. As Chart 1 shows, in market cap terms, Big Tech also dwarfs the world’s leading financial groups (which, again, are from the United States and China), giving it the financial muscle it needs to expand quickly.

Chart 1
MARKET CAPITALISATION (2024): BIG TECHS vs BIG BANKS

SOURCES: Banco de España, Statista and Companies Market Cap (2024).

How is Big Tech revolutionising financial services?

Big Tech firms obtain fundamental information about users’ behaviour as, through their various global platforms, they process huge volumes of data about their purchases, online searches, social relations and interests. By adding financial services to their portfolio, these firms can also incorporate data about users’ payment behaviour and creditworthiness. This enables them to enhance their services across all platforms, and so attract more users, expand their networks and increase their business prospects.

This creates a feedback loop: when more users join, they generate even more data with which to improve services and business opportunities. Through this model, data can be monetised (i.e. used to generate economic value) in an intensive and sophisticated manner. Big Tech’s growth in its original areas of activity fuels its expansion in financial services, and vice versa.

So why is there concern?

As a result of their size, financial muscle and growth potential inherent to their business models, Big Tech firms could gain a large weight and exert a significant influence in the financial sector and, importantly, on how credit is channelled to economic activity.

This raises some concern from the standpoint of financial stability (see Figure 2). For instance, having control of large amounts of funds that are held in digital wallets, and therefore outside the usual channels of payment systems, could affect the cost and stability of short-term bank borrowing and depositor behaviour. Moreover, the credit analysis tools used by Big Tech are different to the more transparent methodologies used by banks. Its tools are based on online-behaviour algorithms and artificial intelligence, and have not been tested over a complete economic cycle. They could also result in an adverse selection of borrowers and an excessive contraction in credit during recessions (procyclicality).

Figure 2
WHY BIG TECH RAISES CONCERNS

Source: Banco de España.

Providing financial services normally requires a licence. Yet the Big Tech firms offer these services using other entities’ licences (“own brands”) or through complex and opaque partnerships with traditional banks, which makes it difficult to carry out a risk assessment of their transactions. In short, they operate within frameworks that challenge the limit of the regulatory perimeter.

As a result of its growth potential, Big Tech could gain a large weight and exert significant influence in the financial sector and on how credit is channelled to the economy

A further risk stems from the fact that some Big Tech firms are providers of critical technology to the financial sector as a whole. Particularly concerning is the concentration of cloud services among a very small number of providers, as it increases the impact of cyberattacks or service disruptions and their potential systemic effect.

In sum, Big Tech platforms are making financial services available to an increasing number of people, and they are doing so more quickly, more efficiently and in a more personalised way than before. There are drawbacks, however, as these platforms also carry risks for their users. There are concerns surrounding privacy, data protection and protecting consumers (against overborrowing and opacity in identifying the counterparty, for example). Moreover, systemic risks could increase as a result of market concentration, traditional banks’ reliance on these platforms’ technology, vulnerability to cyberattacks, credit procyclicality and financial problems spreading to the real economy.

What should be the response in Europe and globally?

Although the relentless advance of technology makes it difficult to assess the impact of Big Techs on the financial system, understanding their activities better and having more specialised mechanisms and resources in place would help determine where the risks ultimately lie and assess, if necessary, how to adapt legislation, to bring these firms into the regulatory perimeter.

While Big Tech platforms make financial services available to more people and enable banks to integrate advanced technologies, they also entail risks for their users and for global financial stability

To address these challenges, a coordinated international response is needed. The institution best placed to provide this is the Financial Stability Board (FSB), and the Banco de España, as a member, continues to work on these issues.