Competition between Big Tech and banks in attracting borrowers can increase their privacy, says BIS research

Competition between Big Tech and banks can boost borrowers’ privacy – BIS. Source: twitter.com

In a working paper, BIS compares the lending business model of Big Tech and traditional banks. The study concludes competition between these two financial sectors can enhance borrowers’ privacy. At the same time, it could also result in more defaults and reduced investment.?

As a rule, big technology firms have access to massive data amounts as many companies operate on their platforms. Although this information can be harnessed to improve a firm’s credit risk assessment, it may also lead to “data dominance” when Big Tech charges more for lending. On the contrary, banks collect deposits at cheaper rates but make do with more limited information on clients.?

Therefore, the BIS paper argues that when banks and Big Tech compete for borrowers, big technology players may temper their drive to collect information about firm characteristics and extract rents. That leads to greater privacy.

However, this privacy boost has a cost. When Big Techs limit their capacity to recognise a firm’s type, the number of costly defaults may rise. Besides, this strategy will reduce investment in profitable opportunities.

The authors suggest that the negative impact of such competition can be mitigated if Big Tech and banks focus on their comparative advantages. Namely, Big Tech can share processed information with banks, while the latter can finance the loans using their cheaper and more ample sources of funding.

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