From TechFin to PlatFin to FinTech 4.0: Balancing Digital Finance, Platformisation and Market Dominance

Finance is an industry characterised by strong economies of scope and scale. These effects have led over time to the emergence of large financial groups and conglomerates. Finance is also characterised by the strong positive and negative externalities generated by its activities: finance has benefits that extend beyond its direct participants in the form of greater economic growth and development, and can also cause instability and crises. Extensive regulation has therefore emerged to control entry into the industry and reduce the likelihood of failure, with the objective of increasing positive externalities and reducing negative ones.

Over time, this combination of factors has inexorably resulted in concentration within the financial sector, posing risks to competition, efficiency and financial stability especially in the context of systemically significant financial institutions. These factors were core to the 2008 global financial crisis and the focus of post-crisis regulatory reforms.

At the same time, while technology and finance have always developed together, digitisation and the application of new technologies has transformed finance, as now embodied in the term FinTech. Much of the focus of the 2010s was on the opportunities and challenges posed by new entrants, in particular FinTech startups using technology to challenge incumbent approaches and models. The business model of these FinTechs (perhaps with certain exceptions in decentralised finance) was to focus on achieving scale.

Like finance, technology benefits from network effects, which manifest with increasing numbers of customers, interconnections and data. Network effects in technology inexorably lead to the emergence of dominant technology platforms as we have seen in both the United States and China.

Access to clients’ data and liquidity, allows for utterly unprecedented economies of scale in finance.

We highlight this process in the context of the asset management industry in one of our papers, and explain the emergence of concentration from a technological perspective. For some years, scholars have discussed the impact of the “rule of the twelve” on corporate governance. Few, however, have looked into why only a mere dozen institutional investors have such a large impact on listed firms. We argue that technology, and in particular the resulting access to clients’ data and liquidity, allows for utterly unprecedented economies of scale in finance. In fact, very large firms that combine features of both finance and technology have developed from the combination of technological evolution (digitisation, datafication, digitalisation), conducive regulatory approaches, and the pro-concentration effects that characterise data and financial industries.

We also see this in the context of the entry of BigTech platforms into finance and the scaling of FinTechs as some move quickly from being from too small for regulators to care about to being too-big-to-fail. These trends characterise the current period in the evolution of FinTech, which in another recent paper we dub FinTech 4.0. We see the decade of the 2020s in finance will be dominated by a massive battle between centralisation and decentralisation, of seeking the positive externalities of data aggregation and finance while at the same time reducing the negative externalities of change at pace that at times bewilders regulators.

Conventional economies of scale, data-driven economies of scale and network effects explain why FinTech markets can increase efficiencies in processes such as client onboarding, compliance, and reporting, and also allow for algorithm-based investment and trading that use market information at a greater pace than humans ever could.

Technological advances that account for cost reduction and increased efficiencies also potentially contribute to decreasing competition in FinTech markets

The same technological advances that account for cost reduction and increased efficiencies also potentially contribute to decreasing competition in FinTech markets. On the one hand, conventional FinTechs (including trading platform Robinhood and the archetypal FinTech firms Aladdin and Ant Group) have been able to collect billions of assets and millions of customers. On the other hand, these very same forces have enabled new entrants into financial services like Meta (formerly Facebook), Apple, Google, Microsoft, and Amazon (“MAGMA”) in the United States, and Baidu, Alibaba, and Tencent (“BATs”) in China, to extend broadly across most aspects of the society and economy within their respective countries and beyond.

The data-driven finance business is a platform industry. In the digital finance context, the term “platform” refers to a systems architecture where multiple applications are linked to and through one technical infrastructure so that users can use one major integrating software system to run all applications written for that system. One outcome of platformisation is financial ecosystems with multiple services linked to clients via one platform, with the platform serving as the indispensable technical core that ties all services and clients together, but also provides some services itself.

The necessity of focussing on building systems to enable data aggregation while limiting the extraction of monopoly rents by dominant private players, whether in finance, in tech or in FinTech/TechFin markets

How can this be done? We present a framework of analysis and highlight the challenges to existing regulatory silos in finance, competition / antitrust, data, and technology regulation. We argue the need for a balanced proportional approach, enabling and encouraging competition and innovation whilst also carefully monitoring emerging scale, concentration and dominance issues. Key to this approach is data regulation and the necessity of focussing on building systems to enable data aggregation while limiting the extraction of monopoly rents by dominant private players, whether in finance, in tech or in FinTech/TechFin markets.

While the resulting concentration or dominance of these “BigTechs” have long been of concern in the European Union, they have now also emerged as major social, political, regulatory, and legal foci of attention elsewhere, with the corporate governance dimension relating to the might of institutional investors particularly pronounced among U.S. corporates, and public concerns at the heart of the Chinese response to AntGroup / AntFinancial.

The evolution of financial ecosystems can bring many advantages. Yet, the rapid emergence of concentration and dominance in digital finance via platformisation can pose great risks; the corporate governance aspects discussed in recent ECGI scholarship is only one of them. Financial regulators worldwide must step up to the difficult challenge of dealing with these transformative contemporary market structures in a sufficiently firm, yet balanced and proportionate, manner.

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By Dirk A Zetzsche, Professor of Law and ADA Chair in Financial Law at the University of Luxembourg, Douglas W Arner, Professor in Law and RGC Senior Fellow at the University of Hong Kong and,  Ross P Buckley, Professor of at the University of New South Wales.

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