BIS Thinks Facebook’s Libra and Tech Companies Could Hurt Banks

Wilfred Michael 

Wilfred Michael

News reporter

24 June 2019,
BIS Thinks Facebook’s Libra and Tech Companies Could Hurt Banks

The Bank for International Settlement (BIS) has become the latest to express concern regarding Facebook’s potential entrance into the global payments infrastructure.

In a report published on Sunday, the international financial institution wrote extensively on how the entrance of big tech companies such as Facebook, Google, Amazon, and Alibaba could potentially hurt banks and cause global financial instability.

The report acknowledged that these tech companies witnessed remarkable growth in the last two decades, meaning that they could within a short time reach the same heights as other “systemically relevant financial institutions.” Notably, the BIS also admitted that these tech companies could leverage big data and their network structure to “enhance the efficiency of financial services provision, and promote financial inclusion.”

Despite the benefits, though, the BIS is wary that tech companies could introduce “new elements in the risk-benefit balance,” including financial stability, consumer protection, and data privacy issues.

Writing on how the entrance of tech companies could hurt banks, the report alleges that the new entrants can rely on big data to assess and monitor lenders, thus issuing loans more efficiently and at a reduced cost than their banking counterparts.

Additionally, while banks can, to some extent, implement some measures to avoid loan default by clients, tech companies can employ more uncomplicated strategies to make lenders fulfill their loan deals. For instance, the report mentions that the tech company can threaten to downgrade or kick out a user if they default making payment for loans.

Another possible way that tech companies like Facebook can potentially hurt banks could be by making it expensive for financial institutions to access users on their platforms. A typical example could be Facebook charging banks higher amounts for advertising on their network.

The report also warned that handing these powers to tech companies could create a situation of monopoly, where they dominate the financial system. They can quickly “influence users' sentiment without the users themselves being aware of it,” the report adds.

The Solution?

Despite the perceived threats to banks, the BIS does not kick against Libra or tech companies entering into the global finance market.

It only asserts that they should be made to come under the same regulation as traditional financial institutions. In cases where no rules exist, regulators should introduce new laws or revamp rules if necessary and also ensure national and international coordination.

"The aim should be to respond to big techs' entry into financial services to benefit from the gains while limiting the risks,” the BIS recommends.

In another report about the BIS in March, also noted the thoughts of BIS general manager, Agustin Carstens who spoke unfavorably about countries issuing cryptocurrencies.

