Big tech can break banks

First there was the financial crisis of 2008. Then years of negative interest rates. Now banks face what one financial regulator calls the “real game changer”.

Jesper Berg, the head of the Financial Supervisory Authority in Denmark, says the next big threat for banks is the rapid spread of big tech into financial services.

The competitive tool is personal data and the playing field is far from even, he says.

“Banks are constrained in what they can do with data,” Berg said in an interview in Copenhagen.

They need to comply with strict regulatory requirements to protect client data. But their industry is being infiltrated by competitors that aren’t necessarily subject to the same rules.

Berg suggests political intervention might be necessary, if banks are to have a fighting chance.

“The biggest issue is, do we make rules in relation to sharing and use of data similar, or do we keep a difference?” Berg said.

“We need to think about whether, and when, we set rules that are different for different types of companies where the activity is basically the same.”

Lars Rohde, the governor of the Danish central bank, has warned that banks will need to rethink their entire business model to adapt to the new world.

Because of the vast pools of information they collect, tech giants like Google, Amazon and Alibaba already enjoy a competitive advantage over banks, Berg says.

According to a report by the global Financial Stability Board, the proprietary consumer data that big tech extracts from social media, combined with the industry’s access to cheap funding, means it “could achieve scale very quickly in financial services”.

Reducing entry barriers for big tech might ultimately hurt competition in financial services.

“Big data lives off selling information, so other companies can target us more specifically,” Berg said. “The potential game changer is big data, depending on what they choose to do” because “they know more about us than anyone else”,

Tech companies that offer loans or take deposits would need to apply for licences and abide by the same rules as banks, Berg said.

But the requirements are murkier for those who decide to operate as a platform for other financial service providers, and that puts banks at a competitive disadvantage.

“The link to customers would essentially be with big tech.

“And everyone knows that whoever has the link to the customers” ends up being able to “cream the profit,” he said. – Bloomberg