Governments and regulators should act to ensure the entry of BigTech firms into financial services will not pose risks to financial stability, competition and data protection, according to the Bank for International Settlements (BIS).

The Basel-based entity, which promotes co-operation between central banks, used its latest annual report to issue a call for a swift regulatory response from governments to ensure a “level playing field between BigTechs and banks”.

Coming a week after social media giant Facebook announced plans to launch its Libra cryptocurrency, the BIS report stated that such moves into digital currencies, payments and online banking services could offer consumers greater efficiency and enhanced financial inclusion.

However, it also warned of “complex trade-offs” when it comes to the potential wide scale destabilisation of the global banking system, citing leading social networks, e-commerce and search engine firms such as Alibaba, Amazon, Facebook, Google and Tencent, as potential disruptors.

“BigTechs' entry into finance introduces additional elements into the risk-benefit equation,” the BIS stated. “Some are old issues of financial stability and consumer protection in new settings, but a new element is BigTechs' access to data from their existing platforms – this could spark rapid change in the financial system through the emergence of dominant players that could ultimately reduce competition.”

It explained that as BigTech firms expand beyond regulatory perimeters and geographical borders, policymakers would need to use a range of institutional mechanisms to help them work together.

“Coordination among authorities - national and international - is crucial to sharpening and expanding their regulatory tools,” it added.

Amongst the key issues for concern, BIS highlighted that lower barriers to provision of financial services in networks with billions of “captive” could also pose issues for market competition, with dominant players pushing all potential challengers out of the market, as well as using advertising clout to favour their own products.

“They can exploit their market power and network externalities to increase user switching costs or exclude potential competitors,” the report explained.

Another, newer type of risk identified is the anti-competitive use of data, giving rise to “digital monopolies” or “data-opolies”.

“Given their scale and technology, BigTechs have the ability to collect massive amounts of data at near zero cost,” the report stated. “Once their dominant position in data is established, big techs can engage in price discrimination and extract rents.”

Hyun Song Shin, economic adviser and head of research at the BIS, said: “The aim should be to respond to BigTechs' entry into financial services so as to benefit from the gains while limiting the risks.

"Public policy needs to build on a more comprehensive approach that draws on financial regulation, competition policy and data privacy regulation,” he added.

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