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FSB: 'open banking' could spur 'big tech' disruption of finance

'Open banking' could be the spur for change in the "competitive dynamics" within financial services markets, the international coordinator of national financial authorities and standard-setting bodies has said.20 Feb 2019

The Financial Stability Board (FSB), which monitors for and makes recommendations to address vulnerabilities affecting the global financial system, and which coordinates financial regulation across the 'group of 20' (G20) major global economies, made the comments in a new report that identified the potential for large technology companies to disrupt sectors like banking.

The report (37-page / 718KB PDF) characterised open banking as a system whereby data held by financial institutions is shared for users and third-party developers through application programming interfaces (API). Open banking is already being implemented in the UK along with further changes affecting payment services across the whole of the EU, and there are similar reforms planned in other jurisdictions around the world, including Australia and Bahrain. The FSB said open banking could boost competition but poses new risks.

According to the FSB, while banks have long faced competitive pressures, the introduction of new technologies and "the impetus provided by open banking" were among the factors that could "change the dynamics of competition quickly".

Competitive pressures could also become "more acute" because of faster changes in business models driven by the deepening push into financial services markets by large technology companies, it said.

Andrew Barber of Pinsent Masons, the law firm behind Out-Law.com, who specialises in financial regulation, said: "Big tech providers find themselves in the strong position of not being burdened by legacy IT systems like incumbent institutions while also being well capitalised and having access to funding. However, should they want to deepen their involvement in financial services markets like the UK they are going to have to grapple with authorisation and compliance issues that the incumbents have spent years dealing with."

"Big tech will likely want to continue to focus on overlay services or partnering with existing financial services firms until they can be confident that the returns from financial services will outstrip the significant authorisation and compliance costs they will face from tackling existing providers head-on," he said.

The FSB's report examined how market developments could impact financial stability.

The watchdog said that the emergence of new fintech companies into the financial services markets in recent times has not had a major effect on financial stability to-date since the products and services those firms offer are either complementary in nature to those offered by incumbent institutions or too small in scale.

It said, though, the impact on financial stability could be much greater should large technology companies elect to deepen their involvement in financial services markets. The FSB attributed this to the "existing wide customer base, trusted customer relationships, strong capital positions and easy access to external funding, and potentially different business focus (for instance to exploit data rather than rely directly on fees)" that 'big tech' has.

The report, though, said that "the incentives and barriers to entry" relevant to large technology companies in financial services "are not yet well understood", and that there are considerable differences across the globe over "the scale of big tech activities in finance".

The FSB said regulators "may wish to regularly assess stability risks, bearing in mind the comparability of the functions performed, the level and types of risks involved, and the size of those activities" as large technology companies expand into financial services.

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