The four largest tech companies reported more than $28 billion in profits in the second quarter of 2020. In the last 5 years, revenues of the world’s largest tech companies have grown by 118 percent versus only 10 percent by traditional manufacturing. Data is their “holy grail,” (consumer personal data generates more than $50 billion in annual revenue just in data broker and marketing data services) to the point that we could actually call those companies — Apple, Facebook, Alibaba, Amazon, and others — “digital multinationals.”
As these digital multinationals move into the lucrative and data-rich finance business, the authorities mandated to supervise the financial market — to preserve the resilience of the financial sector, foster competition, and protect users — are ill-equipped to oversee them.
The authorities mandated to supervise the financial market are ill-equipped to oversee digital multinationals.
This is an issue because the digital multinationals that increasingly shape our economies and societies, often in a legislation and oversight vacuum, have sought conquest of the financial system and its large — and largely profitable — data swathes. Alphabet (Google), Alibaba, Amazon, Apple, Facebook, and Tencent offer financial services, either wallets associated with their main products, or as standalone products.
Examples of Digital Multinationals’ Big Moves Into Financial Services
Tencent, for example, has two integrated payment platforms, Tenpay and WeChat Pay (also known as WePay) that are often referred to as a single payments platform and control 40 percent of the mobile payments market in China, making it the second-largest payments platform after Alibaba’s Alipay. Tencent integrates WeChat Pay into its growing ecosystem of WeChat mini programs and online-to-offline services, which offer food deliveries, online shopping, ride hailing, and other services to the messaging platform’s 1.06 billion monthly active users. Alibaba’s affiliate, Ant Financial, integrates Alipay into Alibaba’s Taobao and Tmall marketplaces. Both Tencent and Ant Financial are increasingly investing in, or partnering with, retailers that offer special discounts to WeChat Pay or Alipay users, and also offer microloans and wealth management products.
Facebook, the world’s leading social media network outside China, has started to roll out Facebook Pay to 2 billion WhatsApp users. In August, the Central Bank of Brazil first authorized, and then stopped, Facebook from providing payment services to 120 million WhatsApp users in Latin America’s largest market. The bank said it had reversed its original decision to ensure competition in the payment system market, allowing the regulator more time to evaluate potential risks to the country’s payment infrastructure, and to work out whether WhatsApp is compliant with regulation. The WhatsApp payment service was also tested in India and Mexico.
Google, which has been in payments since Google Checkout’s launch in 2006, offers retail, peer-to-peer (P2P) and bill payments with Google Pay, and has partnered with eight banks to integrate digital banking. While U.S. adoption has been slow, in India — where a whopping 98 percent of smartphones run on Android — Google Pay has enjoyed stupendous growth, with 67 million active users as of September 2019 and $110 billion in annualized payments volume. Importantly, Google has focused on payments to boost engagement and capture data, not to reap fees — although it takes a 30 percent margin on all sales within the Google Play app store.
Finally, Apple, the world’s most valuable company, uses Apple Pay to enhance the iOS platform and capture a greater share of its customers. It also takes a juicy fee on payments made in its app store.
A Capabilities Gap That’s Miles Wide
The analytical and technical capabilities of these firms far exceed those of the authorities charged with regulating them. The firms are using artificial intelligence and cloud computing to exploit the data of their users through surveillance capitalism and data mining. This is done exclusively to increase shareholders’ value. Meanwhile, central banks and other agencies, which are already barely equipped for the oversight of the more traditional financial sector, are now being charged with overseeing products of digital multinationals they are not familiar with. Most supervisors rely on outdated tools such as Excel, and the uptake of new supervisory technologies is still slow. We witness astonishing delays in data validation and a scarcity of insights generated to conduct risk-based supervision and contain fraud. The roll out of reliable predictive models is also unavailable to most financial authorities. Benoît Cœuré, the new head of the Bank for International Settlements (BIS) Innovation Hub has highlighted the risks, challenges, and opportunities for financial authorities in a recent speech, a call to action for the digital transformation of the public authorities that administer the financial sector.
We witness astonishing delays in data validation and a scarcity of insights generated to conduct risk-based supervision and contain fraud.
In the “data stack” paper that I co-authored with Arend Kulenkampff and Matt Grasser before the pandemic, and in the 2018 RegTech for Regulators Accelerator (R2A) white paper, we pointed at the risks of the “big data divide” between digital multinationals and financial authorities, and discussed the importance of upgrading supervisory technologies (suptech) and making new approaches to digital transformation mainstream. We also presented possible solutions to extend the benefits of the adoption of artificial intelligence (AI) and other technologies to increase competition and support innovation in the financial sector.
Pandemic Increases Urgency
I believe that the pandemic has made these demands even more urgent, and point at some priorities that financial authorities and multilateral and philanthropic organizations should consider in light of the value of financial data in today’s context, the power dynamics that are shifting with the deepening of the data divide, and the pressing need for upgrading financial supervision.
The lockdowns and physical distancing measures that governments have put in place in response to the pandemic make urgent the need for action. This year, a significant share of the world’s population was forced to work remotely and is spending more time online than ever before. During early shelter-in-place orders in the United States, daily users of Facebook increased 12 percent year over year to 1.79 billion. Monthly usage across its family of apps, which also includes Instagram and WhatsApp, rose 14 percent to 3.14 billion. And Facebook’s mostly ad-based business rose along with them: the company’s revenue was up 11 percent year over year. More than ever before, the majority of us rely on e-commerce, social media, online communications platforms, and remote, cashless transactions. This translates into growth of profit and power for the giant digital multinationals: in its fiscal 2020 third quarter, Apple posted quarterly revenue of $59.7 billion, an increase of 11 percent from the same quarter one year ago. In the quarter that ended in July, Alibaba delivered revenue growth of 34 percent, year over year.
On the regulatory side, the recently conducted World Bank-CCAF Global COVID-19 FinTech Regulatory Rapid Assessment Survey (results forthcoming) will give insights into what sort of action will be needed by revealing key internal challenges for supervisors that have emerged during the pandemic. Check back here in the coming weeks for a link to those results.
Risks to Consumers
These trends represent an increased risk to consumers. First, without the right tools to identify and weigh risk, it will be challenging (impossible?) for financial authorities to supervise the rising digital-native financial sector and the giant digital multinationals. The automation of compliance reports and tools to effectively monitor the health of financial service providers (FSPs) accessing granular and timely data are priorities, particularly at a time when on-site supervision is constrained. Digital channels for complaints (e.g., chatbots), and other tools to create better insights into the customer experience, are also needed.
Digital channels for complaints, and other tools to create better insights into the customer experience, are also needed.
Second, digital multinationals may snuff out the smaller, innovative FSPs, applying the same “buy and kill” tactics that have already come under scrutiny in other sectors, posing risks of concentration, and slowing down innovation. This tactic may bring new, much needed, competition into the financial sector at first. Some of them may provide their services for free to retain customers, boost engagement, and capture data, benefiting affordability. However, the long-term impact of the “buy and kill” tactics could be that smaller, innovative, local fintech startups that aim to serve niches of the market — in some cases, those focused on addressing the needs of more vulnerable segments of the population — get mopped up.
To correct the imbalance of power between giant digital multinationals and data-poor FSPs, and to counteract the emerging big data divide, a level playing field needs to be established for financial data access and usage. (This includes other data — from telecoms, for example — that is relevant for financial customers to make choices, and relevant for FSPs to design and roll out new products).
A Potential Solution
One way to level this playing field is a new Open Data Commons, which guarantees access to rich and plentiful data to all market players and customers, and equips them with tools to make them meaningful and actionable. This establishes a shared data platform for the generation, exchange, and dissemination of insights to serve specific use cases for FSPs, customers, and other stakeholders.