Big Tech in finance? There’s a regulator for that
WASHINGTON, Aug 1 (Reuters Breakingviews) - Technology companies have stormed the heights of consumer finance, but they don’t face the regulation that vexes their old-world rivals. While no single financial watchdog has oversight of Apple (AAPL.O), Amazon.com (AMZN.O) or Facebook owner Meta Platforms (META.O), that could change. It all hangs on the views of a panel of watchdogs known as the Financial Stability Oversight Council.
When a company like Apple decides to offer financial services, the potential impact is huge. Take the iPhone maker’s new buy-now-pay-later service. It’s starting small, with six-week duration loans and a borrowing limit of $1,000. But unlike the Apple-branded credit card that’s effectively run by Goldman Sachs (GS.N), the lending decisions and funding for buy-now-pay-later loans are Apple’s own. Tim Cook’s firm is doing some of what a Citigroup (C.N) or Bank of America (BAC.N) does, but without the onerous regulation.
It's a question of potential rather than actual risk. Imagine half the number of iPhone users in the United States, or about 59 million based on estimates by Counterpoint research, end up using the pay-installment service. That would give Apple about as many consumer customers as General Electric’s (GE.N) financing arm, GE Capital, had in 2013. GE Capital required a bailout to back nearly $140 billion of its debt after it unraveled during the 2008 financial crisis.
The cloud divisions of Silicon Valley giants also play a systemic role. The largest banks like JPMorgan (JPM.N) rely on Amazon and others for various tasks, including housing data, processing transactions and running applications. About 45% of banks use Amazon while a similar proportion depends on Microsoft (MSFT.O), with many using both, according to S&P Global’s 451 Research. A disruption or failure through a hack or natural disaster could upend operations and cause a panic.
In GE’s case, it was FSOC that stepped in when it became clear that the regulatory framework had holes in it. The 15-member panel was created after the 2008 financial crisis, and now includes Treasury Secretary Janet Yellen, Federal Reserve Chair Jay Powell, Securities and Exchange Commission chief Gary Gensler and Consumer Financial Protection Bureau head Rohit Chopra. The council designated GE Capital a systemic risk in 2013, and put it under the supervision of the Fed, where it stayed until 2016.
Tech companies would be a timely fit for FSOC. The group doesn’t perform day-to-day watchdog functions but can farm such duties out to an appropriate panel member. The Fed also took supervision of insurer AIG (AIG.N) after the 2008 financial crisis. Other FSOC members have their own expertise: the SEC’s is over capital markets, for example.
And as with GE, it wouldn’t need to throw a regulatory net around the whole of a company. Apple, say, could be asked to carve out its Apple Financing subsidiary into a separate holding company, which could then be subject to rules on underwriting, credit quality and stress testing. Cloud businesses like Amazon Web Service or Microsoft Azure could be deemed systemically important financial utilities, a label already applied to other forms of market plumbing like the Chicago Mercantile Exchange.
None of this would stop tech firms’ financial march, but it would slow them down. Regulated entities would need to have their own chief executive, board and come up with rules on cybersecurity and other areas. British authorities recently floated a range of options to make sure the financial system could withstand a cloud-computing snafu, including regular cyber resilience tests. And financial regulators often parachute examiners into the offices of the companies they supervise, who regularly check operations for risk management. That would be an unfamiliar intrusion for Silicon Valley.
Even if FSOC drags its feet, more red tape for tech firms is inevitable. In October, the CFPB asked Apple, Alphabet’s (GOOGL.O) Google, and Facebook about their payment systems. The agency can issue enforcement actions for violations of user privacy, among other concerns, and leader Chopra is no stranger to assertively using his position on other regulatory bodies – as he showed when he helped speed the exit of then-head of the Federal Deposit Insurance Corporation, Donald Trump appointee Jelena McWilliams.
Still, a more coordinated approach would be better. With billions of users and lax regulation, the risks to consumers and the broader system from big tech firms are growing. Watchdogs, meanwhile, are often reacting to past threats. Putting Silicon Valley on FSOC’s agenda would help keep the financial cops ahead of the game.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
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