Big Tech finance and monetary policy
Recently big tech firms like Alibaba, Amazon, Facebook or Mercado Libre (Big Techs) have started to provide credit to vendors on their commerce platforms. This new type of credit has become quite important in China, Kenya or Indonesia. There are two important characteristics of Big Tech finance: a) they generate credit scores using machine learning and big data and hence are able to identify firms’ characteristics with more precision than traditional credit bureau ratings; and b) due to network effects and the presence of high switching costs between Big Tech platforms, Big Techs can enforce loan repayments by the simple threat of an exclusion from their ecosystem if the firm defaults.
In this paper De Fiore et al. look at how Big Tech finance affects the effectiveness of monetary policy. They argue that big tech credit and bank credit respond very differently to a monetary policy shock. In particular, they argue that bank credit follows closely the response of house prices (typically used as collateral) and reacts very strongly to monetary policy, the response of big tech credit is not statistically significant.
They develop a model where a Big Tech platform intermediates the search and matching between manufacturers and wholesalers and extends working capital loans to the former subject to limited commitment. Firms have access to both big tech credit and secured bank credit. They find:
According to our model, big tech credit reacts less to monetary policy due to a more muted response of firms’ opportunity cost of default on this type of credit (future profits) compared to that of bank credit (physical collateral). Furthermore, as matching efficiency on Big Tech’s commerce platform rises, our analysis shows that the expansion in firms’ profits leads to a higher opportunity cost of default on big tech credit, a higher borrowing limit, looser credit constraints and, ultimately, a higher share of big tech credit. The latter, coupled with the muted response of this new type of credit, leads to weaker responses of credit and output to monetary policy when matching efficiency on Big Tech’s commerce platform is higher.
Big Techs and the Credit Channel of Monetary Policy
Authors: F. De Fiore, L. Gambacorta, C. Manea
From: BIS, Deutsche Bundesbank
The risk profile of Big Tech credit
Big Tech credit pose the highest financial risk argue Zamil et al.:
This assessment is based on the relative complexity of their organisational structures, the scale of their financial and non-financial lines of businesses, the size of their captive user networks, abundance of data and financial resources, which, collectively can have complex interactions with their in-house bank. These attributes can accentuate potential supervisory concerns across the first four risk dimensions. However, Big Techs have greater market access – compared to other tech firms – providing them with more flexibility to provide financial support to their banking entity.
Digital giants at the gate: Tech ownership of banks and the regulatory response
By: Raihan Zamil, Aidan Lawson – BIS
