Level Playing Field

Level Playing Field – What does it really mean?

[Photo by Bill Oxford on Unsplash]

You hear this term being thrown around from the likes of Christine Legarde, Donald Trump, Steven Mnuchin, Jerome Powell, Mark Carney, Brad Garlinghouse … and many more. If you don’t know the names you should research them. But what does it really mean?

Spoiler Alert – depends on the context.

For the Internet of Value, “level playing field” is code for making the BigTech corporates and FinTech solutions adhere to banking rules... saving the big banks and the international financial system from disruption, well from rapid disruption anyway.

Let’s dig in and see what I’m talking about here.

If you say that you want to level the playing field, you mean that you want to make a situation fair, by ensuring that nobody has an advantage over other people. The US trade tariffs are a good example: today we are not competing on a level playing field. Trade with these nations must be conducted on a level playing field and tariffs are the vehicle to level the field. But this is a challenge given the Triffin Dilemma and current state of the global economy.

Those are interesting words from the St. Louis Fed. But do you think the financial regulators will just radically change the current international financial system?

I was inspired to write this down to show how the current financial leaders are viewing this BigTech transformation after listening to an interview with BIS Economic Adviser and Head of Research Hyun Song Shin

BigTech have been moving into financial services market for consumers. Compound this trend with the latest advancements from FinTech, crypto-currencies, blockchain and distributed ledger technology and you can smell disruption bubbling all around.

**Why and how are BigTechs getting into financial services?
**

The BigTech business model is to take the direct interaction of the many users they have and then use the central byproduct of that, which is data, and use that data as input into services that rely on the network effects among the users. That generates more activity which translates to even more data.

This business model (referred to as the DNA Loop) has enabled BigTech to enter financial services using their existing platforms, social media, e-commerce and in search. And this gives them a head start!

**A head start in front of banks, I presume is what Hyun Song Shin meant.
**

I tried to make the DNA Loop look like a smile ;–) ok I didn’t but that’s what it looks like to me.

**What financial services have BigTechs started to provide?
**

Using their existing platforms, they have started providing payments, lending and savings products from other firms.

**What do they offer that traditional banks can’t?
**

They can provide financial services to those that have been excluded from financial services due to lack of documentation, lack of collateral, and distance from banks branch networks.

What are their advantages?

Their business model is low cost, easily scalable.

Two Advantages:

1. Efficiency

2. Financial Inclusion

All this translates to BigTech’s ability to offer financial services to a much larger group than what has been traditionally possible.

What are the risks associated with this BigTech trend of entering the financial services?

China’s BigTech has been very active (WeChat & Alipay) how have regulators in China handled the DNA Loop issues?

China is a good example of the new examples of old themes of Financial Stability concerns. BigTech in China invented the payment industry and are very well established in the financial system.

China’s payment system is closely integrated in the banking sector, there are plenty of banking related issues that are tied up in an integral way with regulation of the payment providers.

**The United States however has had its payment system in place for decades and is ripe for regulatory uncertainty and rapid disruption from BigTech and FinTech
**.

China regulators have created regulations where the payment firms are required to clear their payments on a public platform making it more transparent and there are also rules on instant redemptions from the money market funds that the BigTechs offer. This minimizes the impact on bank funding.

If rapid structural change introduces new elements of risk in the system, regulation will have to be faithful to the spirit of the regulation rather than the letter of the regulation. When the system changes, then you would need to amend the letter of the regulations to align the rules with the spirit of the regulations.

What are the implication of the new element risks due to BigTech DNA business model?

Since these new risks include competition and data privacy the important implication is that a piecemeal approach to policy toward BigTechs will not work. Now, not just the traditional financial stability, but market dominance needs to be taken into account.

**What does that mean for policy makers who maintain the financial stability of the international financial system?
**

The BIS “New Regulatory Compass”

The BIS has layered out a Two dimensional approach to potentially guide policymakers:

1. Entry: How much BigTechs are encouraged to enter the space or allowed into finance.

2. The different approaches to the treatment of data: How much of the choice do you give in the uses of data, for them to find a decentralized solution by selling that data or should we have strict “Walls & Limits” on the use of data so as to “level the playing field” in a more interventionist way.

**How does Facebooks new Libra digital currency fit into this discussion?
**

Alipay and WeChat pay are account-based systems. Libra is a digital token that is backed by actual money, essentially a digital ledger that is updated to say who owns which token. The ledger is updated by 2/3rds majority vote of the members of this association that backs the venture.

This arrangement is more often used for wholesale payments. Several Central Banks have experimented with this type of token for inter-bank payments.

Retail users would need an intermediary to access this kind of wholesale system and there are not much details on that.

What would be much more significant is a retail-oriented payment system based on apps that people use on a daily basis. The key question is how that retail system would operate and how it would link to the Libra blockchain.

If we had an Alipay or WeChat pay on a global scale, that would raise important questions on data privacy and anti-competitive practices. These questions are even more important when discussing cross-border transactions. Public policy should be aimed at achieving a “level playing field”.

Conclusion

BigTechs entry into financial services demands a new complex balancing act between financial stability, competition and data protection.

What lessons have we learned?

BigTechs bring many benefits in terms of financial inclusion but they raise new difficult challenges of traditional financial stability, but also new challenges in terms of competition and data privacy.

So authorities across multiple jurisdictions and cross border will need to operate much more closely.

Typically, the financial regulators and competition authorities have followed much different mandates and with BigTech it is clear policy makers will need to work much more closely. Especially across borders because BigTechs will straddle borders and interlink with the banking sector.

Sounds to me that the Banks want a “level playing field” more than any BigTech.

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