Big Tech Players Pose Risks To Country’s Financial Stability: RBI

The Reserve Bank of India has expressed concerns over risks posed by fintech and big tech players to the banking system.

In the 25th issue of the Financial Stability Report (FSR), released on Thursday (June 30), the central bank highlighted risks ranging from data privacy to anti-competitive behaviour from the big tech companies. 

“The advent of fintech has exposed the banking system to new risks which extend beyond prudential issues and often intersect with other public policy objectives relating to safeguarding of data privacy, cyber security, consumer protection, competition and compliance with AML (anti-money laundering) policies,” the report said.

On big tech companies, the RBI said that such players can scale up rapidly and pose risks to the country’s financial stability. The central bank attributed any such eventuality to ‘increased disintermediation of incumbent institutions’.

“Moreover, complex intertwined operational linkages between big tech firms and financial institutions could lead to concentration and contagion risks and issues relating to potential anti-competitive behaviour,” said the report. 

Concerns About Big Tech 

Overall, the FSR highlighted three broad concerns relating to the entry of big tech companies in the fintech space – financial stability, governance and legislative issues.

The report stated that the big tech companies forayed into the financial domain as payment service providers and have since added a host of services to their kitty.

“They increase financial stability risks a) by bundling several financial activities through their platforms; b) increasing operational interconnectedness with financial incumbents through provision of technological support via outsourcing partnerships; and c) greater financial interconnectedness with financial incumbents,” the RBI said.

The report also stated that big tech companies offer a slew of services spreading across jurisdiction via subsidiaries. This complex structure, according to the RBI, makes the task of identifying risks posed by them challenging. 

The FSR also pointed out that big tech companies have emerged as major providers of outsourced services (cloud services, and others) to major financial institutions, making them critical to the functioning of the banking system. 

The central bank also highlighted concerns relating to anti-competitive behaviour employed by big tech companies. 

“They also have the potential to impact competition and market contestability in the financial domain. The key competitive advantage of BigTechs is the large stock of user data that they generate from their non-financial platforms which often creates data privacy and anti-competition issues,” said the report. 

The FSR also noted that regulators face a peculiar challenge of maintaining a fine balance between spurring innovation and managing risks to financial stability. It called for higher engagement between regulators and industry players to achieve this, adding that such an engagement should focus on promoting a sustainable fintech ecosystem.

According to Inc42, India’s addressable market in the fintech space is projected to reach the $1.3 Tn mark by 2025, growing at a compounded annual growth rate (CAGR) of 31% between 2021 and 2025.

The RBI said that the Indian fintech market is amongst the fastest growing in the world, with an adoption rate of 87%.