Calibrate regulatory schemes with mix of entity- and activity-based rules to address risks from bigtechs: RBI paper

This is important for protecting data privacy and financial stability, as the regulators face the challenges of keeping up the pace with innovations by bigtech companies.

“They face the challenge of balancing between promoting efficiency, protecting data privacy and ensuring financial stability,” said the RBI paper authored by officials from the department of supervision.

“The key paradigmatic shift in the regulatory approach towards addressing the risks from bigtechs lies in calibrating the regulatory frameworks with a mix of entity and activity based rules,” the paper said, suggesting formation of holding companies involved in financial activities, and promoting activity specific licenses.

To be sure, bigtechs are uniquely positioned to alter the financial services landscape with their technological advantages, large user base, wide-spread use by financial institutions and network-effects.

But the increasing and complex interlinkages between financial institutions and tech-companies become an area of concern.

The regulators globally now accept that risks stemming from bigtech activities cannot be adequately addressed through entity-specific or activity-specific regulations alone. The regulations should also reckon the risks that are created by substantive interlinkages within bigtech groups and their role as critical service providers for financial institutions, the paper said.

Notwithstanding the benefits of improved service access and financial inclusion, the regulators are wary especially regarding the bigtechs’ impact on competition and market contestability, consumers’ data privacy rights, and on financial intermediation, said the paper, jointly authored by Vijay Singh Shekhawat, Avdhesh Kumar Shukla, ACV Subrahmanyam and Abhishek Singh.

RBI said the views expressed in the paper are of the authors.

In India, RBI has taken efforts towards bringing critical payment intermediaries under the formal regulated and supervised framework. The directions issued for payment aggregators / payment gateways and framework for outsourcing of payment and settlement-related activities by payment system operators are a step in this direction.

Globally, regulators recognise the benefits of fintechs and endeavour to create a supportive ecosystem.

Several steps have been taken recently in China, the EU and the United States to address the challenges presented by bigtechs, specifically in the areas of competition, data protection, conduct of business, operational resilience and financial stability.