WhatsApp was finally cleared earlier this month to launch its long-awaited payment functionality in India. It is not hard to imagine the new service taking off rapidly when sending money is just a click away on an app with 400 million domestic users.
This kind of built-in connectivity, and its sheer convenience, underlie the potential of financial services delivered by Big Tech platforms. But those same factors should also focus our attention on the new risks that the integration of finance with Big Tech may create and the need for policymakers and regulators in Asia to make choices today about what kind of financial sector they want tomorrow.
Embedding financial services in tech platforms that are omnipresent in people’s daily lives is a powerful proposition. China’s Ant Group demonstrated this as it evolved quickly from an escrow payments service to make credit, insurance, and asset management services available to the 80 million monthly active merchants on Alibaba and over 1 billion users of the Alipay app. It is clear that embedded finance has the potential to reach more people with more relevant services at lower costs than the traditional, bricks-and-mortar retail banking system.
But integrating Big Tech with finance also creates new risks and concerns. Ant’s record-breaking IPO was delayed at the eleventh hour, and financial services on digital platforms face heightened regulatory scrutiny. The National Payments Corporation of India took more than two years to get comfortable with WhatsApp pay. When it finally did, it also announced a cap on third-party apps that means none can process more than 30% of monthly transactions on the Unified Payments Interface, or UPI, infrastructure that WhatsApp uses.
The National Payments Corporation of India took more than two years to get comfortable with WhatsApp pay. © Reuters
It is natural that regulators should have concerns about embedded finance as they seek to balance the objectives of financial inclusion, stability, integrity, and consumer protection. Finance on Big Tech platforms could lead to new forms of digital exclusion or new biases in the algorithms that make credit decisions, for example. Systemic risks could emerge if embedded finance providers are regulated differently to traditional players that offer similar services. And, thanks to network economics, embedded finance could also lead to some companies achieving dominant market positions.
These concerns are pressing because the era of embedded finance has already arrived in Asia, hastened by the broader pickup in digital adoption during the COVID-19 pandemic. As regulators and policymakers across the region address this reality, we believe it is important that they are guided by a set of values-based principles concerning what a fair and efficient retail financial system should look like.
First, finance must always have customers’ well-being at its heart. People use financial services to achieve their goals in life, earning a living, getting an education, paying for health care, or buying a home. When people have financial services that they understand and are connected to their real-world needs, their economic prospects improve. Finance must serve the real economy.
Second, people need to trust their financial services providers. Providers must use business models that align their practices and profits with helping customers to achieve financial health. In a fair financial system, winning business models compete for trust. Customers know upfront how much they are paying and what they are getting.
Third, as data becomes more central to financial services, concerns about privacy, security and trust have grown. Nobody should have to worry about what happens to their personal information when using financial services. A fair financial system would give control over data back to customers. It would protect that data, provide transparency about it, require permission to access it, and allow customers to move accounts to other providers freely.
Fourth, fintech entrepreneurs need an open infrastructure and shared set of standards that facilitate service delivery at low cost. Digital infrastructure should make it possible for people to move money quickly and cheaply. It should make new solutions more available to more people. In the ideal system, the private sector should leverage a public stack of infrastructure technologies such as identity authentication to create applications that deliver distinct customer value propositions.
Fifth, a financial system must be regulated in a way that enables continued innovation. Citizens rely on regulations to protect them, but these can be hard to update as technology changes. Flexible, responsible, and consumer-centric regulation based on the nature of the service — rather than the legal structure of the provider — are essential for these principles of fair finance to work.
Of course, these principles embody an idealized vision for an end-state. They are not a road map or strategy, which would be different in every market. But these overarching principles of fairness can help guide the growth of embedded finance in Asia, ensuring that the region captures its benefits and manages its risks. As financial services become part of the Big Tech platforms used by billions, we need collective action to ensure that this system remains customer-centric, open, and inclusive.