The increasing links between financial institutions and Big Tech, particularly in cloud computing, is alarming — and regulators need to sit up, the European Banking Authority (EBA) warned on Tuesday (Sept. 21).
The European Union (EU) watchdog said that regulators are not up to speed on the risks associated as banks create digital marketplaces, highlighting the need to create a framework to identify potential issues that could arise as links strengthen.
“Indeed, it appears that the vast majority of competent authorities currently have a limited understanding of platform-based business models,” the EBA told Reuters.
Collaborations between finance and tech companies have accelerated since the onset of the pandemic, with banks setting up digital marketplaces for products like payments and mortgages hosted on the vast cloud internet platforms of Big Tech firms.
This has enabled customers to make purchases and payments using their mobile phones linked directly to their bank accounts, helping financial institutions to reduce costs, reach a wider range of customers, and increase partnerships with tech firms.
For example, a collaboration between Google and Citi enables users of the Google Play app to open a checking account with Citi, while Apple Pay allows banks’ debit and credit card holders to set up an Apple wallet to make payments.
But the EU watchdog said banks relying on digital platforms “for marketing and distribution of services creates new forms of financial, operational and reputational interdependencies for banks which poses some challenges for regulators in monitoring market developments and any risks from these interdependencies,” the Reuters report said.
To solve the problem, the EBA has proposed developing a framework next year to gather information about dependencies among banks on digital platforms, with plans to create indicators that will assess potential concentration, contagion and systemic risks.
In a report published by the EBA in June, the watchdog also outlined proposals to boost EU adoption and use of RegTech, which is mostly used to protect against anti-money laundering (AML), to counter terrorism financing and to prevent fraud as well as for prudential reporting, ICT security and credit assessments.