Financial 'Megy' Big Tech... "Efficiency Declines if Regulatory Blind Spots Are Exploited"

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[Asia Economy Reporter Song Seung-seop] A warning has been issued that big tech companies, regarded as the 'catfish' of the financial industry, may lose competitiveness if they grow by exploiting regulatory arbitrage. There are concerns that they could become entities akin to the 'too big to fail' large financial institutions.

According to the financial sector on the 5th, Professor Jeon Seon-ae of the Graduate School of International Studies at Chung-Ang University recently submitted a report titled "Fintech, Big Tech, and the Financial Industry: Prospects and Challenges" to the Korea Deposit Insurance Corporation's Financial Risk Review. In the report, Professor Jeon pointed out, "If the purpose of (big tech's) participation in finance is to leverage regulatory blind spots to increase their market dominance, efficiency may disappear in the long term."

Professor Jeon continued, "Big tech operates both financial and non-financial businesses simultaneously, which can cause systemic risks unlike traditional financial institutions," adding, "Currently, the financial services provided by big tech constitute a relatively small portion of their overall activities, but due to the nature of big tech's business model, they can quickly become systemically important institutions, that is, 'too big to fail'."

There was also an analysis that fintech companies have not yet established themselves as competitors to existing financial institutions. Professor Jeon explained, "Fintech companies have expanded their service areas and customer bases through financial innovation," but "due to still low capital strength, except for some, they face limitations in competing with existing financial institutions."

However, a lightweight organizational structure was cited as a strength. Professor Jeon evaluated, "Members of fintech companies are often composed of personnel oriented towards innovation, resulting in high efficiency," and "Fintech companies are smaller in scale and focus on a few tasks, so they have fewer organizational inefficiency issues compared to banks."

He also urged changes in the domestic financial regulatory environment. As big tech's influence in the financial industry grows, the principle of 'same function, same regulation' should be established. He stated, "(Big tech companies) attract customers in the financial market through data they have acquired in existing industries," and "the more users a platform has, the higher the usage benefits due to network effects, increasing the likelihood of securing market dominance."

He added, "In the long term, this may reduce social welfare and potentially negatively impact the financial system," and proposed, "It is necessary to create a fair competitive environment among existing financial companies, fintech firms, and big tech companies, and to minimize regulatory arbitrage and regulatory gaps according to the principle of same conduct, same regulation."

Furthermore, he argued, "Measures such as meticulous monitoring to minimize side effects caused by the expansion of big tech companies' dominance and shifting financial supervision methods to a preemptive supervisory approach should be considered."