Competition between Big Tech and banks in attracting borrowers can lead to greater privacy but could also result in more defaults and reduced investment, according to research from the BIS.
In a working paper, BIS delves into the lending business model of Big Tech, comparing it to the traditional bank model.
Large technology firms have access to massive amounts of data about firms that operate on their platforms. While this information can be harnessed to improve the assessment of a firm's credit risk, it may also lead to "data dominance", when the Big Tech can extract rents from the firm.
In contrast, banks collect deposits at cheaper rates but make do with more limited information on clients.
The paper argues that when banks and Big Tech compete for borrowers, the latter has an incentive to temper their drive to collect information about firm characteristics and extract rents, leading to greater privacy.
But, this greater privacy has a cost: if Big Techs limit their capacity to recognise a firm's type, this may increase the number of costly defaults and reduce investment in profitable opportunities.
The authors suggest that this can be mitigated if Big Tech and banks focus on their comparative advantages: the former 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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