USA, April 13, 2019: The Bank for International Settlements has just published a Working Paper entitled BigTech and the Changing Structure of Financial Intermediation that we thought might interest you. Please see below for a summary of its contents.
BigTech and the Changing Structure of Financial Intermediation
BigTech firms are entering finance, and their access to massive amounts of information may give them an edge in areas like credit and beyond. Using exclusive data from BigTech lenders, new research shows that these benefits may extend to borrowers too: the small business clients of BigTech lenders tend to have higher sales and a wider range of products than rival firms. BigTech lenders themselves thrive in countries with less competitive banks and less strict regulation.\
The new study by Jon Frost, Leonardo Gambacorta, Yi Huang, Hyun Song Shin and Pablo Zbinden, notes that while BigTech firms currently extend less than 1% of global private sector credit, their footprint is growing.
Focus: This paper investigates the entry of big technology companies (BigTech) into financial services. It seeks to address three questions: What economic forces are driving this development? Do BigTech lenders have an information advantage compared with traditional data or processing methods, particularly when gauging creditworthiness? Do firms receive BigTech credit perform differently from competitors?
Contribution: The paper reports findings based on exclusive data from BigTech lenders to provide both an overview and new cross-country evidence on BigTech activities in finance. The analysis that draws on detailed data from China’s Ant Financial and Latin America’s Mercado Libre sheds light on key questions about this potentially game-changing development in the world of finance.
Findings: Differences in the development of FinTech credit reflect differences in income and financial market structure. The higher a country’s income and the less competitive its banking system, the larger the FinTech credit volume. BigTech credit benefits even more from these factors. Looking at credit scoring, data from Mercado Libre show that credit models using machine learning and data from the e-commerce platform are better at predicting losses than traditional credit bureau ratings. Finally, using detailed microdata from Mercado Libre and Ant Financial, the authors find that small firms in Argentina that used BigTech credit offered more products and had higher sales than competitors, and that small firms in China also offered more products.
Abstract: We consider the drivers and implications of the growth of “BigTech” in finance – ie the financial services offerings of technology companies with an established presence in the market for digital services. BigTech firms often start with payments. Thereafter, some expand into the provision of credit, insurance, and savings and investment products, either directly or in cooperation with financial institution partners. Focusing on credit, we show that BigTech firms lend more in countries with less competitive banking sectors and less stringent regulation. Analyzing the case of Argentina, we find support for the hypothesis that BigTech lenders have an information advantage in credit assessment relative to a traditional credit bureau. For borrowers in both Argentina and China, we find that firms that accessed credit expanded their product offerings more than those that did not. It is too early to judge the extent of BigTech’s eventual advance into the provision of financial services. However, early evidence allows us to pose pertinent questions that bear on their impact on financial stability and overall economic welfare.
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