Platform-Based Business Models and Financial Inclusion

Three types of digital platforms are expanding in financial services: (i) fintech entrants; (ii) big tech firms; and (iii) increasingly, incumbent financial institutions with platform-based business models. These platforms can dramatically lower costs and thereby aid financial inclusion – but these same features can give rise to digital monopolies and oligopolies. Digital platforms operate in multi-sided markets and rely crucially on big data. This leads to specific network effects, returns to scale and scope, and policy trade-offs. To reap the benefits of platforms while mitigating risks, policymakers can: (i) apply existing financial, antitrust and privacy regulations, (ii) adapt old and adopt new regulations, combining activity and entity-based approaches, and/or (iii) provide new public infrastructures. The latter include digital identity, retail fast payment systems and central bank digital currencies (CBDCs). These public infrastructures, as well as ex-ante competition rules and data portability, are particularly promising. Yet to achieve their policy goals, central banks and financial regulators need to coordinate with competition and data protection authorities.

In this paper, the BIS discusses the implications of platform-based business models in financial services for financial inclusion, market structure and regulation.