Big tech business model as a risk factor

Is it time to talk about a potential elephant in the room?

During October, Bank for international settlements (BIS) published a FSI Occasional paper, “Big tech regulation: in search of a new framework” (The Paper). The Paper was written by Johannes Ehrentraud, Jamie Lloyd Evans, Amelie Monteil and Fernando Restoy. In the beginning of The Paper, BIS stress that the views expressed in The Paper are solely those of the authors and do not necessarily reflect those of the BIS or the Basel-based standard-setting bodies.

New technology and new regulations have had positive influence and been the main change drivers of the financial market and customer behaviour the latest decade. The financial technology has transformed the business models of financial service providers and a number of new players has entered into the financial industry. In general this has gained the market development and increased customer satisfaction. But this has also created new risk factors.

This is also the theme in The Paper and the authors state, inter alia, that; “Big tech business models entail complex interdependences between commercial and financial activities and can lead to an excessive concentration in the provision of both financial services to the public and technology services to financial institutions; consequently, big techs could pose a threat to financial stability in some situations”.

They continue by saying; “The challenges that this specific business model pose for society cannot be fully addressed by the current (mostly sectoral) regulatory requirements”. Thus, according to the authors of The Paper, there are shortcomings in the regulatory structure to tackle the additional risks which are arisen through these aspects. I tend to agree to this conclusion. The regulatory development has to some extent not kept pace with the changing market environment, i.e. the needed mitigating rules are not there yet.

According to The Economist; “Crunchbase, a data provider, estimates that American tech firms have already shed more than 45,000 jobs this year”. The Economist also state that; “Alphabet, Amazon, Apple and Microsoft have collectively lost $2trn in market value over the past 12 months”. And according to Forbes, the stock value of Meta Platform is for the year down more than 71% and is no longer in the top 30 largest companies. ??

But as the authors of The Paper say; “… most of the above risks are not strictly related to the financial soundness of big techs but often with their business models – in particular internal and external interdependencies – and with their conduct of business”. As been pointed out by the authors of The Paper, dependency by financial institutions on third-party providers generates additional operational risks and this risk accelerate when the concentration of some of those services is offered by a relatively small set of (big tech) providers.

As been recognised by many we are currently facing a new economic reality, with high inflation, increased interest rates etc. It is probably a good idea to start asking ourselves whether the large interconnection between financial services and non-financial commercial activities in many tech companies in combination with the high linkage to the incumbent banks and other financial institutions might run the risk of worsening the situation.

The tech companies for sure increase competition in financial industry, increase the range of services for the customers and enable traditional banks to improve their business model. But the unique business model of the big tech groups with a wide range of interlinked financial services and non-financial activities will also amplify the operational risk in the financial market and the financial system and by that potentially become an additional risk factor for the financial stability in the current macro-economic situation. ??