Technological innovation in the market for financial services has given rise to new products, new delivery channels and, most importantly, new providers, such as big techs. These developments are the source of a number of opportunities but may also present certain risks that need to be addressed by appropriate policy action.

In the case of big techs, most of the risks arise from their ability to leverage on a common infrastructure – notably large amounts of client data – that helps them gain a competitive advantage in a wide variety of non-financial and financial services and create substantial network externalities. Big tech business models entail complex interdependences between commercial and financial activities and can lead to an excessive concentration in the provision of both financial services to the public and technology services to financial institutions; consequently, big techs could pose a threat to financial stability in some situations.

The challenges that this specific business model pose for society cannot be fully addressed by the current (mostly sectoral) regulatory requirements. Two specific regulatory approaches for big techs could then be considered and to some extent combined. The first is segregation, which is a structural approach that seeks to minimise risks arising from group interdependencies between financial and nonfinancial activities by imposing specific ring-fencing rules.

An alternative approach to segregation is inclusion, which consists in creating a new regulatory category for big tech groups with significant financial activities. Regulatory requirements would be imposed for the group as a whole, including the big tech parent. These group-wide requirements would not normally have a pivotal prudential (ie minimum capital and liquidity) focus, but would introduce controls for intragroup dependencies across financial and non-financial subsidiaries. This could be achieved by establishing a series of requirements (which are spelled out in the paper) that mainly relate to the governance, conduct of business, operational resilience and, only when appropriate, the financial soundness of the group as a whole.

While the segregation approach is arguably simpler and bolder, the inclusion approach provides for a more tailored option to address specific risks associated with big techs’ business model. In any event there is a clear need for the international regulatory community to develop guidance.