Regulators have little understanding of risks from banks creating digital marketplaces with tech companies and a framework is needed to spot potential contagion if things go wrong, the European Union’s banking watchdog said on Tuesday.
The European Banking Authority’s warning is the latest sign that financial regulators are starting to pay more attention to Big Tech’s increasing links with finance, such as in cloud computing.
Finance and tech companies are coming closer together as banks set up digital marketplaces for products like payments and mortgages, as well as other financialand non-financial services, a process which has accelerated since the pandemic began.
This means customers can make payments or buy things using their mobile phone which links directly to their bank account.
This so-called platformisation helps banks to cut costs and reach a wider range of customers, and includes partnerships with tech groups.
Apple Pay, for example, allows banks’ debit and credit card holders to set up an Apple wallet to make payments. Google and Citi have teamed up to enable users of the Google Pay app to open a checking account with Citi.
But the EU watchdog said reliance on digital platforms for marketing and distribution of services creates new forms of financial, operational and reputational interdependencies.
The trend is posing “some challenges” for regulators in monitoring market developments and any risks from these interdependencies, the watchdog said.
“Indeed, it appears that the vast majority of competent authorities currently have a limited understanding of platform-based business models,” EBA said.
EBA said it proposes to develop a framework next year to collect information about dependencies among banks on digital platforms, and create indicators to assess potential concentration, contagion and systemic risks. But it said new legislation is not needed at this stage.
The watchdog called on the EU to update guidance on when a digital activity should be considered a crossborder provision of services and therefore come under EU and national laws that require information to be reported to regulators to improve visibility.
EBA said a small number of banks say they had encountered some issues in accessing digital platforms on terms they considered fair.