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Big tech finance companies are one step ahead of regulators | Barry Eichengreen | The Guardian
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srcSet="https://i.guim.co.uk/img/media/64348ccd481ea8c1913ab9f9cd02718714cce924/0_0_5479_3288/master/5479.jpg?width=465&dpr=2&s=none&crop=none" media="(min-width: 320px) and (-webkit-min-device-pixel-ratio: 1.25), (min-width: 320px) and (min-resolution: 120dpi)"/><source srcSet="https://i.guim.co.uk/img/media/64348ccd481ea8c1913ab9f9cd02718714cce924/0_0_5479_3288/master/5479.jpg?width=465&dpr=1&s=none&crop=none" media="(min-width: 320px)"/><img alt="A woman walks in front of the Alipay building in Shanghai, China" src="https://i.guim.co.uk/img/media/64348ccd481ea8c1913ab9f9cd02718714cce924/0_0_5479_3288/master/5479.jpg?width=465&dpr=1&s=none&crop=none" width="465" height="279.05092170104035" loading="eager" class="dcr-evn1e9"/></picture><span class="dcr-v822l1"><div class="dcr-gup2gr"><div class="dcr-zy1nbx"><label for="the-checkbox" class="dcr-1xgwz8b"><svg width="6" height="14" fill="white" viewBox="0 0 6 14"><path d="M4.6 12l-.4 1.4c-.7.2-1.9.6-3 .6-.7 0-1.2-.2-1.2-.9 0-.2 0-.3.1-.5l2-6.7H.7l.4-1.5 4.2-.6h.2L3 12h1.6zm-.3-9.2c-.9 0-1.4-.5-1.4-1.3C2.9.5 3.7 0 4.6 0 5.4 0 6 .5 6 1.3c0 1-.8 1.5-1.7 1.5z"></path></svg></label><input type="checkbox" id="the-checkbox"/> <div id="the-caption"><figcaption data-spacefinder-role="inline" class="dcr-1ie0kc7"><span class="dcr-1inf02i"><svg width="18" height="13" viewBox="0 0 18 13"><path d="M18 3.5v8l-1.5 1.5h-15l-1.5-1.5v-8l1.5-1.5h3.5l2-2h4l2 2h3.5l1.5 1.5zm-9 7.5c1.9 0 3.5-1.6 3.5-3.5s-1.6-3.5-3.5-3.5-3.5 1.6-3.5 3.5 1.6 3.5 3.5 3.5z"></path></svg></span><span class="dcr-1qvd3m6">Alibaba’s Ant Financial and Tencent’s WeChat provide a wide range of financial products. </span> Photograph: Alex Plavevski/EPA</figcaption></div></div></div></span><a href="#img-1" data-ignore="global-link-styling" aria-hidden="true" tabIndex="-1" class="open-lightbox dcr-13fd1ms"><button data-element-id="a4baf9eb-5671-4c02-ac91-ce5a05678d25" type="button" aria-haspopup="dialog" class="open-lightbox dcr-4tmywn"><svg viewBox="-3 -3 30 30" xmlns="http://www.w3.org/2000/svg" aria-hidden="true"><path fill-rule="evenodd" clip-rule="evenodd" d="M23 8.75V1.5l-.5-.5h-7.25v1.25l4.5.6L14 8.575 15.4 10l5.75-5.725.6 4.475zm-22 6.5v7.25l.475.5h7.25v-1.25l-4.475-.6 5.725-5.775L8.6 14l-5.775 5.725-.575-4.475z"></path></svg><span class="dcr-194i6pr">View image in fullscreen</span></button></a></div><span class="dcr-n4pnam"><figcaption data-spacefinder-role="inline" class="dcr-1fujct4"><span class="dcr-1inf02i"><svg width="18" height="13" viewBox="0 0 18 13"><path d="M18 3.5v8l-1.5 1.5h-15l-1.5-1.5v-8l1.5-1.5h3.5l2-2h4l2 2h3.5l1.5 1.5zm-9 7.5c1.9 0 3.5-1.6 3.5-3.5s-1.6-3.5-3.5-3.5-3.5 1.6-3.5 3.5 1.6 3.5 3.5 3.5z"></path></svg></span><span class="dcr-1qvd3m6">Alibaba’s Ant Financial and Tencent’s WeChat provide a wide range of financial products. </span> Photograph: Alex Plavevski/EPA</figcaption></span></figure></div></div></div><aside style="--grid-area:title;" data-gu-name="title" class="dcr-1fnjjtg"><div class="dcr-10355cg"><div class="dcr-0"><div class="dcr-4pzc03"><span class="dcr-1v9xu6e"></span><a href="https://www.theguardian.com/business/series/project-syndicate-economists" data-component="series" data-link-name="article series" class="dcr-u0pbjs"><span>Project Syndicate economists</span></a><span class="dcr-n4pnam"><a href="https://www.theguardian.com/business/technology" data-component="section" data-link-name="article section" class="dcr-1v9e6r1"><span>Technology sector</span></a></span></div></div></div></aside><div style="--grid-area:border;" data-gu-name="border" class="dcr-1fnjjtg"><div class="dcr-upmzd8"></div></div><div style="--grid-area:headline;" data-gu-name="headline" class="dcr-1fnjjtg"><div class="dcr-14emo0l"><div class="dcr-13w83bs"><div class="dcr-cohhs3"><div class="dcr-notra3"><div aria-hidden="true" class="dcr-13832xi"><svg width="11" height="11" viewBox="0 0 11 11" fill="currentColor"><path d="M5.4 0C2.4 0 0 2.4 0 5.4s2.4 5.4 5.4 5.4 5.4-2.4 5.4-5.4S8.4 0 5.4 0zm3 6.8H4.7V1.7h.7L6 5.4l2.4.6v.8z"></path></svg> This article is more than <strong>3 years old</strong></div></div><h1 class="dcr-s88ov6">Big tech finance companies are one step ahead of regulators</h1><div class="dcr-1nvgr5i">This article is more than 3 years old</div><div class="dcr-1uv1bpy"><div class="dcr-1ct8skw"><a rel="author" data-link-name="auto tag link" href="https://www.theguardian.com/profile/barryeichengreen">Barry Eichengreen</a></div></div></div><div><svg xmlns="http://www.w3.org/2000/svg" width="100%" height="29" viewBox="0 0 1300 29" preserveAspectRatio="none" stroke="var(--straight-lines)" stroke-width="1" aria-hidden="true" focusable="false" class="dcr-2232f3"><line x1="0" x2="1300" y1="0.5" y2="0.5"></line><line x1="0" x2="1300" y1="4.5" y2="4.5"></line><line x1="0" x2="1300" y1="8.5" y2="8.5"></line><line x1="0" x2="1300" y1="12.5" y2="12.5"></line><line x1="0" x2="1300" y1="16.5" y2="16.5"></line><line x1="0" x2="1300" y1="20.5" y2="20.5"></line><line x1="0" x2="1300" y1="24.5" y2="24.5"></line><line x1="0" x2="1300" y1="28.5" y2="28.5"></line></svg></div></div></div></div><div style="--grid-area:lines;" data-gu-name="lines" class="dcr-1fnjjtg"><div class="dcr-mc7gai"><span class="dcr-1vetsv0"><svg xmlns="http://www.w3.org/2000/svg" width="100%" height="29" viewBox="0 0 1300 29" preserveAspectRatio="none" stroke="var(--straight-lines)" stroke-width="1" aria-hidden="true" focusable="false" class="dcr-1rctyfj"><line x1="0" x2="1300" y1="0.5" y2="0.5"></line><line x1="0" x2="1300" y1="4.5" y2="4.5"></line><line x1="0" x2="1300" y1="8.5" y2="8.5"></line><line x1="0" x2="1300" y1="12.5" y2="12.5"></line><line x1="0" x2="1300" y1="16.5" y2="16.5"></line><line x1="0" x2="1300" y1="20.5" y2="20.5"></line><line x1="0" x2="1300" y1="24.5" y2="24.5"></line><line x1="0" x2="1300" y1="28.5" y2="28.5"></line></svg></span></div></div><div style="--grid-area:standfirst;" data-gu-name="standfirst" class="dcr-1fnjjtg"><div class=" dcr-16dfovq"><p>Innovation by companies such as Amazon, Alibaba and Tencent presents big challenges </p></div></div><aside style="--grid-area:meta;" data-gu-name="meta" class="dcr-1fnjjtg"><div class="dcr-14emo0l"><div class=" dcr-1v9sla6"><div class="dcr-5oiine"><div class="dcr-1kpcv08"><div><details style="--mobile-color:inherit;" class="dcr-1pexjb9"><summary class="dcr-1ybxn6r"><span class="dcr-u0h1qy">Mon 12 Apr 2021 12.00 BST</span></summary>Last modified on Fri 28 Oct 2022 06.59 BST</details></div></div><div data-print-layout="hide" class="dcr-9dgpdq"><div class=" dcr-16lnb0w"><gu-island name="ShareButton" priority="feature" deferUntil="visible" props="{"pageId":"business/2021/apr/12/big-tech-finance-regulators-amazon-alibaba-tencent","webTitle":"Big tech finance companies are one step ahead of regulators","format":{"design":8,"display":0,"theme":1},"context":"ArticleMeta"}"><a href="mailto:?subject=Big tech finance companies are one step ahead of regulators&body=https://www.theguardian.com/business/2021/apr/12/big-tech-finance-regulators-amazon-alibaba-tencent?CMP=share_btn_url" type="button" class="dcr-bao4ku">Share<div class="src-button-space"></div><svg viewBox="-3 -3 30 30" xmlns="http://www.w3.org/2000/svg" aria-hidden="true"><path fill-rule="evenodd" clip-rule="evenodd" d="M19 16c1.675 0 3 1.35 3 3 0 1.675-1.325 3-3 3a2.97 2.97 0 0 1-2.975-3c0-.125 0-.275.025-.375L7.1 14.15a2.9 2.9 0 0 1-2.075.825C3.325 14.975 2 13.65 2 12a3.004 3.004 0 0 1 3.025-3.025c.775 0 1.5.35 2.075.875l8.95-4.475c-.025-.1-.025-.225-.025-.4A2.966 2.966 0 0 1 19 2c1.675 0 3 1.325 3 2.975C22 6.65 20.675 8 19 8c-.8 0-1.475-.325-2.05-.825l-8.975 4.45C8 11.7 8 11.825 8 12s0 .3-.025.375l8.975 4.45c.575-.5 1.25-.825 2.05-.825m0-12.8c-.975 0-1.8.775-1.8 1.775S18.025 6.8 19 6.8c1 0 1.825-.825 1.825-1.825S20 3.2 19 3.2m0 17.6c1 0 1.825-.825 1.825-1.8 0-1-.825-1.8-1.825-1.8-.975 0-1.8.8-1.8 1.8 0 .975.825 1.8 1.8 1.8"></path></svg></a></gu-island></div><div class=" dcr-1csot3r"><div class="dcr-14baf59"><div></div></div></div></div></div></div><div class="dcr-fu29fd"><span class="dcr-1lhv23l"><gu-island name="ExpandableMarketingCardWrapper" priority="enhancement" deferUntil="visible" props="{"guardianBaseURL":"https://www.theguardian.com"}"></gu-island></span></div></div></aside><div style="--grid-area:body;" data-gu-name="body" class="dcr-1upb05m"><span class="dcr-1giivcq"><gu-island name="ExpandableMarketingCardWrapper" priority="enhancement" deferUntil="idle" props="{"guardianBaseURL":"https://www.theguardian.com"}"></gu-island></span><div class="dcr-1a4fred"><div class="dcr-14emo0l"><div id="maincontent" class="dcr-1bwys2b"><div class="article-body-commercial-selector article-body-viewer-selector dcr-1q6n3e0"><p class="dcr-1n1orvu"><span style="color:var(--drop-cap);font-weight:300;" class="dcr-15rw6c2">I</span>n 2009, in the midst of the global financial crisis, <a href="https://www.project-syndicate.org/columnist/paul-volcker" data-link-name="in body link">Paul Volcker</a>, the former Federal Reserve chair, famously <a href="https://nypost.com/2009/12/13/the-only-thing-useful-banks-have-invented-in-20-years-is-the-atm/" data-link-name="in body link">observed</a> that the only socially productive financial innovation of the preceding 20 years was the automated teller machine. One wonders what Volcker would make of the tsunami of digitally enabled financial innovations today, from mobile payment platforms to internet banking and peer-to-peer lending.</p><p class="dcr-1n1orvu">Volcker might be reassured: like the humble ATM, many of these innovations have tangible benefits in terms of lowering transactions costs. But as a critic of big financial firms, Volcker presumably also would worry about the entry of some very large technology companies into the sector. Their names are as familiar as their services are ubiquitous: Amazon in the US, the messaging company Kakao in Korea, the online auction and commerce platform Mercado Libre in Latin America, and the Chinese technology companies <a href="https://www.theguardian.com/business/alibaba" data-link-name="in body link" data-component="auto-linked-tag">Alibaba</a> and Tencent.</p><div id="sign-in-gate"><gu-island name="SignInGateSelector" priority="feature" deferUntil="visible" props="{"contentType":"Article","sectionId":"business","tags":[{"id":"business/series/project-syndicate-economists","type":"Series","title":"Project Syndicate economists"},{"id":"business/technology","type":"Keyword","title":"Technology sector"},{"id":"business/alibaba","type":"Keyword","title":"Alibaba"},{"id":"business/federal-reserve","type":"Keyword","title":"Federal Reserve"},{"id":"business/business","type":"Keyword","title":"Business"},{"id":"technology/amazon","type":"Keyword","title":"Amazon"},{"id":"technology/technology","type":"Keyword","title":"Technology"},{"id":"uk/uk","type":"Keyword","title":"UK news"},{"id":"us-news/us-news","type":"Keyword","title":"US news"},{"id":"world/world","type":"Keyword","title":"World news"},{"id":"business/useconomy","type":"Keyword","title":"US economy"},{"id":"type/article","type":"Type","title":"Article"},{"id":"tone/comment","type":"Tone","title":"Comment"},{"id":"business/fintech","type":"Keyword","title":"Fintech"},{"id":"profile/barryeichengreen","type":"Contributor","title":"Barry Eichengreen","bylineImageUrl":"https://i.guim.co.uk/img/static/sys-images/Guardian/Pix/pictures/2008/10/01/barry_eichengreen_140x140.jpg?width=300&quality=85&auto=format&fit=max&s=ad56a2803d6a485ec412f77b3086ca81"},{"id":"tracking/commissioningdesk/uk-business","type":"Tracking","title":"UK Business"}],"isPaidContent":false,"isPreview":false,"host":"https://www.theguardian.com","pageId":"business/2021/apr/12/big-tech-finance-regulators-amazon-alibaba-tencent","idUrl":"https://profile.theguardian.com","switches":{"externalVideoEmbeds":true,"abSignInGateMainVariant":true,"lightbox":true,"abGpidPrebidAdUnits":true,"prebidAppnexusUkRow":true,"prebidMagnite":true,"commercialMetrics":true,"prebidTrustx":true,"scAdFreeBanner":false,"adaptiveSite":true,"prebidPermutiveAudience":true,"compareVariantDecision":false,"enableSentryReporting":true,"lazyLoadContainers":true,"ampArticleSwitch":true,"remarketing":true,"articleEndSlot":true,"keyEventsCarousel":true,"registerWithPhone":false,"darkModeWeb":true,"targeting":true,"remoteHeader":true,"slotBodyEnd":true,"prebidImproveDigitalSkins":false,"ampPrebidOzone":true,"extendedMostPopularFronts":true,"emailInlineInFooter":true,"showNewPrivacyWordingOnEmailSignupEmbeds":true,"prebidAnalytics":true,"extendedMostPopular":true,"ampContentAbTesting":false,"prebidCriteo":true,"okta":true,"imrWorldwide":true,"acast":true,"twitterUwt":true,"prebidAppnexusInvcode":true,"ampPrebidPubmatic":true,"abUsaExpandableMarketingCard":true,"a9HeaderBidding":true,"prebidAppnexus":true,"abOnwardsContentArticle":false,"enableDiscussionSwitch":true,"prebidXaxis":true,"stickyVideos":true,"interactiveFullHeaderSwitch":true,"discussionAllPageSize":true,"prebidUserSync":true,"audioOnwardJourneySwitch":true,"brazeTaylorReport":false,"callouts":true,"sentinelLogger":true,"geoMostPopular":true,"weAreHiring":false,"relatedContent":true,"thirdPartyEmbedTracking":true,"prebidOzone":true,"ampLiveblogSwitch":true,"ampAmazon":true,"prebidAdYouLike":true,"mostViewedFronts":true,"optOutAdvertising":true,"abSignInGateMainControl":true,"googleSearch":true,"disableFrontContainerShowHide":true,"abOptOutFrequencyCap":true,"brazeSwitch":true,"prebidKargo":true,"consentManagement":true,"personaliseSignInGateAfterCheckout":true,"prebidSonobi":true,"idProfileNavigation":true,"confiantAdVerification":true,"discussionAllowAnonymousRecommendsSwitch":false,"absoluteServerTimes":false,"permutive":true,"comscore":true,"ampPrebidCriteo":true,"newsletterOnwards":false,"youtubeIma":true,"webFonts":true,"liveBlogTopSponsorship":true,"prebidImproveDigital":false,"abAdBlockAsk":false,"ophan":true,"crosswordSvgThumbnails":true,"prebidTriplelift":true,"weather":true,"prebidPubmatic":true,"serverShareCounts":false,"autoRefresh":true,"enhanceTweets":true,"prebidIndexExchange":true,"prebidOpenx":true,"prebidHeaderBidding":true,"idCookieRefresh":true,"discussionPageSize":true,"smartAppBanner":false,"abNewHeaderBiddingEndpoint":true,"historyTags":true,"brazeContentCards":true,"remoteBanner":true,"emailSignupRecaptcha":true,"prebidSmart":true,"shouldLoadGoogletag":true,"inizio":true,"europeBetaFront":true}}"></gu-island></div><p class="dcr-1n1orvu">These entities now do virtually everything related to finance. Amazon extends loans to small and medium-sized businesses. Kakao offers the full range of banking services. Alibaba’s Ant Financial and Tencent’s WeChat provide a cornucopia of financial products, having expanded so rapidly that they recently became targets of a Chinese government <a href="https://www.reuters.com/article/us-china-payment-cenbank/china-plans-tougher-antitrust-rules-for-non-bank-payments-industry-idUSKBN29P15T" data-link-name="in body link">crackdown</a>.</p><p class="dcr-1n1orvu">The challenges for regulators are obvious. Where a single company channels payments for the majority of a country’s population, as does M-Pesa in Kenya, for example, its failure could crash the entire economy. Regulators must therefore pay close attention to operational risks. They must worry about the protection of customer data – not just financial data but also other personal data to which big tech companies are privy.</p><p class="dcr-1n1orvu">Moreover, the big tech firms, because of their ability to harvest and analyse data on consumer preferences, have an enhanced ability to target their customers’ behavioural biases. If those biases cause some borrowers to take on excessive risk, big tech will have little reason to care if it is merely providing technology and expertise to a partner bank. This moral hazard is why Chinese regulators now require the country’s big techs to <a href="https://www.scmp.com/business/banking-finance/article/3122637/china-tighten-online-lending-rules-2022-additional" data-link-name="in body link">use their own balance sheets</a> to fund 30% of any loan extended via co-lending partnerships.</p><p class="dcr-1n1orvu">Governments also have laws and regulations to prevent providers of financial products from discriminating on the basis of race, gender, ethnicity and religion. The challenge here is distinguishing between price discrimination based on group characteristics and price discrimination based on risk.</p><p class="dcr-1n1orvu">Traditionally, regulators require credit providers to list the variables that form the basis for lending decisions so that the regulators can determine whether the variables include prohibited group characteristics. And they require lenders to specify the weights attached to the variables so that they can establish whether lending decisions are uncorrelated with ethnic or racial characteristics once conditioned on those other measures. But as big tech companies’ artificial intelligence-based algorithms replace loan officers, the variables and weights will be changing continuously with the arrival of new data points. It’s not obvious that regulators can keep up.</p><p class="dcr-1n1orvu">In algorithmic processes, moreover, the <a href="https://weaponsofmathdestructionbook.com/" data-link-name="in body link">source of bias can vary</a>. The data used to train the algorithm may be biased. Alternatively, the training itself may be biased, with the AI algorithm “learning” to use the data in biased ways. Given the black-box nature of algorithmic processes, the location of the problem is <a href="https://www.jstor.org/stable/26545017?seq=1" data-link-name="in body link">rarely clear</a>.</p><p class="dcr-1n1orvu">Finally, there are risks to competition. Banks and fintechs rely on cloud computing services operated by the big tech firms, rendering them dependent on their most formidable competitors. Big techs can also cross-subsidise their financial businesses, which are only a small part of what they do. By providing a range of interlocking services, they can prevent their customers from switching providers.</p><p class="dcr-1n1orvu">Regulators have responded with open banking rules requiring financial firms to share their customer data with third parties when customers consent. They have authorised the use of application programming interfaces that allow third-party providers to plug directly into financial websites to obtain customer data.</p><p class="dcr-1n1orvu">It is not clear that this is enough. Big techs can use their platforms to generate large amounts of customer data, employ it in training their AI algorithms, and identify high-quality loans more efficiently than competitors lacking the same information. Customers may be able to move their financial data to another bank or fintech, but what about their non-financial data? What about the algorithm that has been trained up using one’s data and that of other customers? Without this, digital banks and fintechs won’t be able to price and target their services as efficiently as the big techs. Problems of consumer lock-in and market dominance won’t be overcome.</p><p class="dcr-1n1orvu">In an old parable about banks and regulators, the banks are greyhounds – they run very fast. The regulators are bloodhounds, slow afoot but faithfully on the trail. In the age of the platform economy, the bloodhounds are going to have to pick up the pace. Given that only three central banks report having <a href="https://tinyurl.com/nwxcz6av" data-link-name="in body link">dedicated fintech departments</a>, there is reason to worry that they will lose the scent.</p><p class="dcr-1n1orvu"><em>Barry Eichengreen is a professor of economics at the University of California, Berkeley, and a former senior policy adviser at the IMF.</em></p><p class="dcr-1n1orvu"><em><a href="https://www.project-syndicate.org/" data-link-name="in body link">© Project Syndicate</a></em></p></div></div><gu-island name="SlotBodyEnd" priority="feature" deferUntil="visible" 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