Big Tech in Banking: Implications for Competition in Consumer Markets and Risks to Financial Stability
The director of the Consumer Financial Protection Bureau (CFPB) presented the agency’s Semiannual Report to the U.S. Congress on December 14. Noting that consumer finance markets are “truly in transition,” Director Rohit Chopra offered observations regarding what the CFPB is doing to prepare for the future, especially as it confronts “the challenges of Big Tech in banking.”
Director Chopra noted that Big Tech companies and other “digital giants” have leveraged their existing platforms to expand their reach into banking and finance, including with respect to payment platforms. He observed that this entry raises broader concerns about competition and user choice, notwithstanding the typically welcome news that new entrants may be able to challenge incumbents and promote increased competition in the market. For instance, the director noted how Big Tech firms can tie their payment platforms to their social media offerings or mobile operating systems, restrict users in how they make contactless payments outside of any proprietary apps, and use their scale to harvest data for purposes other than moving money between parties—given the strong network effects that exist from payment systems.
As a result, Director Chopra said the CFPB is closely studying the expansion of Big Tech firms into consumer finance markets, particularly with respect to payment platforms, as well as examining the effects of large technology companies accepting payments and providing financial services in other jurisdictions. The director also noted that the agency has issued orders to a number of Big Tech firms to determine what data they collect from transactions and whether they can use this data to the advantage of their other business lines. According to the director, the CFPB is particularly interested in how the Big Tech firms are implementing existing consumer protections and making decisions on account approvals, freezes, and terminations.
The role of Big Tech firms in the financial sector not only has important implications for competition in consumer finance markets, but also for risks to the broader stability of the sector. For instance, the Financial Stability Oversight Council’s (FSOC) 2022 Annual Report, released on December 16, identified the financial sector’s concentrated dependency on a limited number of service providers, such as cloud service providers, for critical information technology services as a potential risk to financial stability.
In particular, the report noted that leveraging technology service providers can give financial institutions flexibility and scalability in their IT environments, but that certain IT services are not easily transferrable to cloud environments. Because of this, some financial institutions may need to retrain or hire new talent as they use new technology service providers. Additionally, the report cautioned that financial institutions must be capable of identifying and understanding the line between their own responsibilities to manage the risks of a particular cloud deployment and those of the service provider, especially where there is a shared responsibility model for security and system configuration. The report also warned that errors or mistakes in software development, deployment, and maintenance relative to contracted underlying technology services can potentially cause service outages at the service providers.
In light of these observations, FSOC noted that it supports ongoing collaboration to examine third-party service providers and the services they provide to the financial system, including enhanced supervisory programs for controls in key areas such as payment services and cloud computing. FSOC also recommended that Congress pass legislation that ensures relevant agencies have adequate examination and enforcement powers to oversee third-party providers.