What is the DNA effect for Big Tech? In a sentence, the DNA effect is the ability of large technology companies to build a competitive advantage by leveraging user generated data in their networks. DNA in this context stands for ‘data-network-activities’ and refers to how the business model of large technology companies (like Google, Apple, Facebook, Alibaba, Tencent aka Big Tech) depends on direct interactions of users which generates lost of data and the ability of these companies to use this data to scale up operations and enter into new areas like financial services. As Big Tech expands in scale and enters new areas like financial services, these new areas in turn generate more data from the users and creates a network effect to give them a competitive advantage. In other words, the DNA effect is the unique business model of Big Tech which allows them to generate and harness user data to scale up their operations using network effects. Using the DNA effect, Big Tech can very quickly become a dominant force in financial services and alter the landscape of financial services irreversibly. This can be seen in China where just two companies (Alibaba and WeChat) account for 90 of mobile payments amounting to billions. The crackdown in China of consumer technology companies in private sector which began last November with Ant Group’s $35 billion abandoned IPO offering can be explained as a late reaction to this market dominance.
In other countries also, the entry of Big Tech in financial services raises new challenges of market concentration due to the DNA effect and could lead to abuse of user data in the absence of any oversight and regulation. Central banks are not responsible for any oversight over consumer data however given that that this user data enables Big Tech to gain market share in financial services through the DNA effect the flurry of regulatory announcements in China maybe a precursor of some form of oversight expected to come in other countries also.
A recent BIS paper, raises the same concerns about exponential growth of Big Tech and market dominance in financial services and has proposed developing entity-based rules i.e. specific rules for certain entities like technology companies to complement activity-based rules e.g. money transmitter licensing requirement for payment activity in US. The activity based regulatory system was designed for an earlier era where the concept of user generated data did not exist; as an example the current money transmitter laws in US were passed in the 1950’s and were designed for money remittance providers and not for technology companies who have massive amounts of consumer/user data that can be harnessed to make a profit and dominate the market. The Digital Market Act (DMA) in EU could be viewed as another example of entity based rules as it defines a framework of rules and oversight over ‘gatekeepers’ essentially large online platforms run by Big Tech.
These concerns of market dominance by Big Tech companies is not new and earlier papers and blog posts have also noted how quickly digital innovation is scaling up in financial services however this DNA effect will only get stronger with time as more and more alternative means of money transfer and payment start to flourish. It is in the same context that a recent Bloomberg article notes that the rise of Stablecoins and and other initiatives like Non-Fungible Token (NFT’s) run the risk of becoming an alternate source of payment system without any checks and oversight from central banks. As more and more users start using Stablecoins and NFT’s their interactions will become part of the closed loop systems of Big Tech and using the data drawn from social media and other e-commerce platforms the companies will find more ways to promote these alternative payment systems which could endanger the smooth functioning of money order system.
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