Featured Product

    BIS Paper Examines Business Model for Lending by Banks and Bigtechs

    BIS recently published a paper that studies the lending business model for big tech firms in comparison with the traditional bank intermediation process. The study concludes that banks and big tech firms need to focus on their comparative advantages to mitigate the inefficiencies inherent in their processes. As part of which, a bank-big tech joint venture, wherein a big tech provides information derived from big data to banks, is advisable in comparison to the big tech providing raw data to banks.

    In the last decade, large technology companies, also known as big techs, have moved into the provision of financial services, with some becoming substantial players in payments in several advanced and emerging market economies. The big techs have access to massive amounts of data about firms that operate on their online platforms or use their QR-code payment systems. This information can be harnessed to improve the assessment of the credit risk of a firm. Recently, big techs have started competing with banks especially in the market for loans to small and medium-size enterprises (SMEs). The study presented in the paper examines the competition between big techs and banks in the loan market for SMEs where adverse selection and difficulty of enforcing repayment cause frictions. The study focused on loans to firms, in particular SMEs, because big techs mainly provide credit to small vendors in their ecosystem.

    The study shows how competition between banks and big techs in attracting borrowers can lead to greater privacy of borrowers, as big techs have an incentive to temper their drive to collect information about firm characteristics. However, the limited capacity of big techs to recognize a firm's type increases the number of inefficient defaults and reduces investment in profitable opportunities. One way to mitigate these inefficiencies is for big techs to share their data with the banks that make loans funded with cheap deposits. The study investigated two information-sharing arrangements. In one, the big tech makes data public for any bank that wants to use them, for example, by conferring the firm type information to a public credit bureau. In the other arrangement, the big tech privately gives the firm type information to the bank, for example, by selling it credit scoring services. These two ways of sharing information lead to different outcomes.

    Lack of access to deposits makes funding by big techs more costly than the funding by banks and it is a factor limiting their supply of lending. Conversely, lack of information would result in banks funding insolvent firms. Thus, it seemed natural to investigate whether it is possible to exploit these relative advantages so that the big techs gather the raw data, process them, and share relevant information with the banks that make loans funded with deposits. The study found that it could be more costly for a bank to extract information from the raw data, as big techs are likely to be better placed in terms of the use of credit scoring techniques based on machine learning and big data to better assess the creditworthiness of firms. Thus, a joint venture (bank-big tech) in which the big tech shares the information, such as credit scores, rather than the raw data, would be advisable. However, the analysis of the optimal business arrangement between banks and big techs is an additional relevant area for future research.


    Related Links


    Keywords: International, Banking, Lending, Credit Assessment, Credit Scoring, Financial Disintermediation, P2P Lending, Big Data, Big Tech, Fintech, BIS

    Featured Experts
    Related Articles

    HKMA Sets Out Guidance on Adoption of Cloud Computing

    The Hong Kong Monetary Authority (HKMA) has set out guidance for authorized institutions on supervisory expectations with respect to the adoption of cloud computing.

    August 31, 2022 WebPage Regulatory News

    HKMA Expects Banks to Join Commercial Data Interchange by End-2022

    The Hong Kong Monetary Authority (HKMA) plans to amend the Supervisory Policy Manual module IC-7 to reflect its regulatory expectations in respect of the Commercial Data Interchange (CDI) and its Link with the Commercial Credit Reference Agency (CCRA).

    August 26, 2022 WebPage Regulatory News

    FSI Paper Suggests Global Regime for Critical Service Providers

    The Financial Stability Institute (FSI) of the Bank for International Settlements published a brief paper that examines the macro-prudential concerns of operational resilience with respect to cloud service providers and big tech firms and offers ideas on how to address these concerns.

    August 25, 2022 WebPage Regulatory News

    CFTC Issues Rule on IBOR Swaps, Extends RFI for Climate Risk

    The Commodity Futures Trading Commission (CFTC) finalized a rule modifying the interest rate swap clearing requirements and extended, from August 08, 2022 to October 07, 2022, the comment period on a Request for Information (RFI) on climate-related financial risks.

    August 24, 2022 WebPage Regulatory News

    ECB Penalizes Crédit Agricole SA for Breach of EU Law

    The European Central Bank (ECB) has imposed administrative penalties on Crédit Agricole SA for violating the banking law in European Union.

    August 23, 2022 WebPage Regulatory News

    ESMA Proposes Improvements to Third Country Benchmarks Regime

    The European Securities and Markets Authority (ESMA) published its response to the European Commission consultation on the regime applicable to the use of benchmarks administered in a third country.

    August 19, 2022 WebPage Regulatory News

    OSFI Issues Guidance on Capital & Liquidity Treatment of Cryptoassets

    The Office of the Superintendent of Financial Institutions (OSFI) extended the comment period for the revised guidelines on third-party risk and climate risk management (Guidelines B-10 and B-15, respectively).

    August 18, 2022 WebPage Regulatory News

    APRA Finalizes Reporting Standards for Updated Basel Capital Framework

    The Australian Prudential Regulation Authority (APRA) finalized the reporting standards to support the updated capital adequacy and credit risk capital requirements for authorized deposit-taking institutions.

    August 18, 2022 WebPage Regulatory News

    FCA Issues Updates on LIBOR Transition and Enhanced SM&CR Status

    The Financial Conduct Authority (FCA) issued a statement for issuers and bondholders of outstanding LIBOR-linked bonds, encouraging the market participants to continue the transition of outstanding LIBOR-linked bonds to fair alternative rates.

    August 16, 2022 WebPage Regulatory News

    FI Updates Deactivated Validation Rules for Banks and Investment Firms

    The Swedish Financial Supervisory Authority (FI) has updated the lists of deactivated European Banking Authority (EBA) validation rules for periodic reporting, via Fidac, for banks and investment firms.

    August 16, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8476