Large technology firms (“big techs”) have access to massive amounts of data about firms that operate on their online platforms or use their QR-code payment systems. 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 and reduce its profits to the minimum. In the case of e-commerce platforms, data dominance is compounded by the fact that firms are somewhat captive in the big tech ecosystem. In fact, defaulting on a big tech loan could cause a firm not only to be excluded from future loans (as in the traditional case of bank lending) but also to be shut out from the e-commerce platform and its payment services.
This BIS paper studies the lending business model of big techs, comparing it with the traditional bank intermediation process based on collecting deposits at cheaper rates but making do with more limited information on clients. In particular, the authors develop a theoretical model to study an economy in which big techs compete with traditional banks by lending to firms that operate on their platforms. The authors focus on two advantages that big techs have with respect to banks: better information on their clients and better enforcement of credit repayment, since big techs can exclude a defaulting firm from their ecosystem. For their part, banks have more varied and cheaper forms of funding.