The RBI raised three primary concerns about big tech companies including the latter’s potential to become dominant players in the financial services sector.
In its biannual Financial Stability Report released yesterday, the Reserve Bank of India (RBI) has raised concerns around the involvement of big tech companies in financial services.
While acknowledging that Big Tech offers a range of digital services with a substantial footprint in payments, banking, asset management crowdfunding, and insurance of advanced and emerging market economies, and also “the promise of supporting financial inclusion and generating lasting efficiency gains”, these companies also raise important policy issues like privacy, cybersecurity, maintaining a level playing field with banks, operational risks, the challenge to anti-trust rules, and too-big-to-fail issues, the RBI said in its report.
Specifically, the report pointed out, there are at least three challenges from Big Tech:
- They straddle many different (non-financial) lines of business with sometimes opaque, overarching governance structures.
- They have the potential to become dominant players in financial services.
- Big tech companies are generally able to overcome limits to scale in financial services provision by exploiting network effects.
To tackle these concerns, the report further recommends that central banks and financial regulators use a blend of activity and entity-based prudential regulation. Along with this, it adds that international cooperation is also important with increasingly internationalised borders of the digital economy.
Activity-based regulation means imposing a set of rules on all players offering a particular service while entity-based prudential regulations mean imposing a set of requirements on entities with specific licenses.
The report notes that an activity-based approach is already used in areas of anti-money laundering [AML] or combating the financing of terrorism [CFT].
As the Economic Times noted, this report comes months after when, in November 2020, the RBI-regulated NPCI (National Payments Corporation of India) had imposed caps of 30 percent on third-party apps using the Indian government’s United Payments Interface (UPI). At present, Google, Facebook-owned WhatsApp, and Amazon are involved in providing digital payments services. In February, the Economic Times had reported that Reliance, Facebook, and Google had partnered to launch their own payments network under the New Umbrella Entity (NUE) framework.
While the government hopes NUEs encouraging networks like UPI would help reduce the pressure on NPCI, there has been some backlash. In February 2021, a PIL was filed in the Supreme Court seeking directions to the RBI and the NPCI to ensure the data privacy of users of third-party payment apps and e-wallets.
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