In his 2020 Annual Report letter to shareholders, JPMorgan Chase Chairman and CEO Jamie Dimon wrote at length of the need for a “level playing field” between traditional institutions and newcomers like big techs.
Dimon stated that banks “are facing extensive competition from Silicon Valley, both in the form of fintechs and big tech companies, that is here to stay.”
However, “while we will argue for a level playing field, both in terms of how products and services are treated by regulators and possibly how competition should be treated across platforms, we are not relying on much to change,” said Dimon. “So we will simply have to contend with the hand we are dealt and adjust our strategies as appropriate.”
It turns out two research papers from early 2021 address the issue in detail. They illustrate that Dimon’s assessment may be correct: achieving a truly level playing field would be very challenging. And may not even be good policy.
Both papers were produced by the Financial Stability Institute, which is part of the Bank for International Settlements. BIS works with many of the world’s banking regulators — including the U.S. — and the views taken are interesting in part because they transcend specific countries’ regulatory setups. This is appropriate given that in a relatively short space of history, the big techs have become international phenomena themselves.
The papers are “Fintech Regulation: How to Achieve a Level Playing Field” and “Big Techs in Finance: Regulatory Approaches and Policy Options.”
Missing the Bigger Point:
While many financial executives have focused on the direct product competition from big techs, they may be missing the bigger issue: data.
The “big techs” paper alludes to what Amazon’s Jeff Bezos calls the “flywheel effect,” that is, once something gets going good, it spins faster and faster.
“The more users a [big tech] platform has, the more data it generates,” the paper states. “More data, in turn, provide a better basis for data analytics, which enhances existing services and thereby attracts more users.”
The fintech paper notes that the wealth of data held by big techs represents a competitive edge over traditional financial institutions in the sale of specific financial services. Restricting use of that data might even the odds, but it could hurt consumers. In theory, the paper states, open banking could democratize the use of data in financial services, but things haven’t worked out that way so far.
To Level the Playing Field, Where Would You Start?
Both papers make the point that there are two broad approaches to financial regulation, and they relate very much to how big techs in banking would be regulated.
First, there is “entity” regulation. Putting aside specific agencies, there is a body of regulation and supervision that applies to banks and credit unions by virtue of what they are. That is, they are traditional regulated institutions that have traded certain advantages, such as being able to gather insured deposits, for rules and scrutiny over their affairs. Big tech companies like Google, Amazon, Facebook, Apple and others — even Walmart now that it is an ecommerce giant — aren’t chartered or insured.
Second, there is “activity” regulation. This term refers to regulation based on the type of financial activity an organization engages in. The term “functional regulation” has been used historically for this facet, meaning, if you fulfill a given function, you should be regulated like anyone else that provides the same function.
In reality, what banks and credit unions have now is more of a blend. Fintechs and big techs that participate directly in given areas, such as money transfer, must obtain licenses for those activities, generally speaking, but sometimes the processes that apply differ from those applicable to traditional institutions.
One point made in the big techs paper is that big techs’ business models present challenges to legislators and regulators.
“One is the great speed with which big techs could become systematically important even in areas where their operations appear relatively modest at present. Another challenge is to respond to the various risks their activities generate,” the paper states. Risks include those to privacy, consumer protection, the operation of markets and financial stability.
“What regulators are increasingly appreciating is that, while big techs share a number of key characteristics, no two are alike. Thus, the risks they generate might differ depending on their core business line, which may have implications for the ‘right’ approach to be taken by an authority.”
— “Big Techs in Finance,” Bank for International Settlements
BIS makes the point that different types of institution may produce different types of risk even when they are performing the same activity. It’s a matter of how the activity touches on other things it is doing — somewhat like a Rubik’s cube.
So, leveling the playing field will be tricky because approaches will differ. But the challenges of getting that parity go beyond even that.
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Bluntly, Is Competition a Regulatory Concern?
The American banking industry’s lobbyists have called for a level playing field long before Amazon was a glint in Bezos’ eye and before Mark Zuckerberg was born. Once the targets were the likes of money market funds, Merrill Lynch and, in the days of deposit interest-rate controls, it was banks versus “thrifts” (savings associations). The bank versus credit union rivalry continues.
A Bucket of Cold Water:
A fundamental premise behind all the rhetoric is that fairness is a fundamental for financial regulation. What if the people in charge don’t feel that obligation?
These two papers are policy development instruments, not policy, but the fintech paper addresses the issue of fairness bluntly:
“Yet fostering a level playing field is not the primary objective of financial regulation. Public policy goals such as financial stability, market integrity and consumer protection rank first in the order of priorities. Moreover, equating the conditions to be satisfied by different types of player in particular market segments would not always promote more competitive markets. Therefore, achieving a level playing field would only be desirable if higher-priority policy objectives are ensured.” [Emphasis added.]
When the issue of regulation is approached from this vantage point, according to the fintech paper, entity-style regulation, rather than activity regulation, could be seen as most appropriate.
“In fact,” the paper states, “contrary to what industry and other observers often claim, there seems to be a strong case for relying more, and not less, on entity-based rules. The current framework could be complemented with specific requirements for big techs that would address risks stemming from the different activities they perform.”
Something that the papers point out is that much of big tech’s financial activities so far has involved partnerships with regulated entities. Apple’s Apple Card relies on Goldman Sachs, for example, and Amazon credit cards are issued by banking companies, including Chase. Google’s coming Plex project is a partnership where a group of banks and credit unions are providing the underlying accounts. Big techs are more directly involved in payments than in banking and that involves required licensing in some areas.
Is ‘Ecosystem Regulation’ the Answer?
As this discussion illustrates — and it’s only a summary of two fairly complex documents — big techs’ financial activities and aspirations have begun raising issues not contemplated before.
One approach that may someday be applied relates to the growing importance of ecosystems. Amazon, for example, comprises several ecosystems. In fact it is practically an economy unto itself.
The big tech paper suggests that a sort of internal regulatory setup could be applied within ecosystems. In a way this goes along with the idea that while big tech activities may look like what banking does, the ultimate goals can be very different.