The UK Financial Conduct Authority (FCA) recently published a discussion paper (here) summarizing its preliminary findings on the potential competition impact of Big Tech entry into retail financial services. The FCA is now inviting stakeholder comments on a range of questions focusing on the areas of payments, deposit taking, consumer credit, and insurance. The discussion paper is open to feedback—particularly from industry players such as banks, payments firms, and fintechs—until January 15, 2023.
This development signals the increasing regulatory scrutiny that Big Tech companies—defined in the paper as “large technology companies with established technology platforms and extensive established customer networks”—are garnering as they consider entering into or expanding in retail financial services. Companies in this space should take note of the key market themes identified by the FCA and consider the potential impact to their businesses. Firms may wish to consider responding to the questions for discussion posed by the FCA as its work may inform future digital markets and financial regulations in the UK or be the basis for a referral to the Competition and Markets Authority (CMA) for an antitrust investigation.
The FCA’s paper comes as a response to the increasing presence of Big Tech companies in the retail financial industry, as demonstrated in various diverse sectors. Big Tech’s financial activities range from digital wallets and peer-to-peer payments,1 to consumer credit initiatives2 and price comparison services for insurance products.3
At this stage, Big Tech companies have stayed away from becoming fully regulated banks (i.e., they cannot take deposits or issue mortgages), and have opted to enter financial markets mainly through partnerships with regulated entities (e.g., Apple’s cooperation with Goldman Sachs on a savings account in the U.S.4). Even still, given the unique characteristics of Big Tech firms, governments in multiple jurisdictions are considering new regulatory regimes to complement existing competition laws. However, the FCA is worried that by the time any new regulatory regimes are in place, the consumers would already be “locked in” the firms’ ecosystems—the FCA characteristically mentions that “Big Tech firms’ access to unparalleled data, and an ability to combine data across their ecosystems, provides them with a unique competitive advantage that incumbents and fintechs do not possess.”
The FCA has preliminarily identified the following five market themes:
- There is potential for Big Tech firms to enhance the overall value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions.
- In the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term, they may seek to rely less on partnerships and compete more directly with existing firms.
- Big Tech firms’ entry may not be sequential or predictable. While initial forms of entry may be hard to predict, once momentum builds, we might see significant market changes occur quickly.
- In the short term and possibly enduring longer, Big Tech firms’ entry in financial services could benefit many consumers.
- In the longer term, there is a risk that the competition benefits from Big Tech entry in financial services could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes.
Highlight: Payments Sector
As noted in the FCA report, payments have been the natural starting point for Big Tech firms entering financial services in many jurisdictions around the world, though their manner of entry has varied by jurisdiction. In China, for example, Big Tech firms have entered the payments sector by directly providing payment services (e.g., Alipay was created to provide a faster and more efficient payment method for both merchants and consumers on Alibaba). In the UK, entry into payments has focused on the provision of add‑on services on top of existing infrastructure (e.g., providing technologies and services to facilitate the storage and authentication of payment information).
The payments sector may pose unique competition considerations given the network effects associated with achieving scale. As explained in the FCA discussion paper, “Network effects mean that platforms become more valuable to their users as they grow, which in turn makes them a more attractive proposition to further prospective users. Entrants may need to attract a large number of customers to one or both sides of the entrant’s platform.”5
In light of these market dynamics the FCA warns that while offering advantages to consumers in the short term6, Big Tech firms could in the long term “control access (and data) to a significant portion of transactions (consumers and merchants) through their grip of key mobile gateways, creating the potential for market power over in‑person mobile transactions (and to a lesser extent for remote browser or app transactions). As gatekeepers to mobile based transactions, they could have the ability and incentive to exploit their market power.” The FCA specifically warns of a high risk of Big Tech companies “self-preferencing” their own payment or transfer services through control of defaults and interoperability features in their messaging services. Such practices could also attract scrutiny of antitrust regulators in the EU and UK.
Related Developments
The U.S. Department of the Treasury recently issued a report identifying opportunities to improve the U.S. payment system, “The Future of Money and Payments,” in response to President Joe Biden’s March 2022 Executive Order on Ensuring Responsible Development of Digital Assets. Among other recommendations, the report urged the U.S. government to “encourage use of instant payment systems to support a more competitive, efficient, and inclusive U.S. payment landscape.”7 In the United States, examples of instant payment systems include the Clearing House’s RTP Network, which was launched in 2017, and the FedNow Service, which the Federal Reserve plans to launch in 2023.
Nonbank payment companies and technology providers in particular should take note of the opportunities for public-sector and private-sector collaboration in the specific actions that the report specified for the U.S. government in connection with this recommendation:
The U.S. government should promote development and use of innovative access technologies by payment providers, to facilitate greater consumer access to, and use of, instant payment systems. These efforts could include continued engagement in standard setting, including for interoperability, clarification of regulatory frameworks where necessary, and potentially public-private partnerships to explore possibilities for low-tech instant payment system access.
Thus, even as the competitive landscape continues to shift in the U.S. payment industry with the introduction of instant payment systems, there are new opportunities for technology companies (including, potentially, Big Tech companies) to enter or expand in payment services in a manner that could promote important public policy goals.
Conclusion
The financial sector (including fintech) is of great importance to the economies around the world, especially with respect to the anticipated interplay between digital platform and financial regulatory regimes and traditional antitrust enforcement involving Big Tech.
The potential competition impacts of Big Tech’s entry and expansion into retail financial services are garnering greater regulatory attention, as reflected by the FCA’s report. At this pivotal moment in retail financial services, technology companies interested in entering or expanding in the industry would be well-advised to proceed with caution in areas of regulatory sensitivity—and, at the same time, not miss opportunities for advancing public policy goals while driving growth.
[1] In the United States, Apple launched Apple Cash in 2021, allowing iPhone and Apple Watch users to send funds via iMessage.
[2] See e.g., Amazon’s Monthly Payments offering in cooperation with Barclays. Available at https://www.amazon.co.uk/Barclays-Instalments/dp/B094DFWTMC.
[3] Amazon launches UK portal for buying insurance, https://www.ft.com/content/c68373ad-4deb-46f8-afaf-90a79de84862.
[4] See https://www.apple.com/newsroom/2022/10/apple-card-will-let-users-grow-daily-cash-rewards-while-saving-for-the-future/.
[5] For a U.S. perspective on the unique network effects associated with the payments industry, see Cheng, Jess, and Joseph Torregrossa (2022). “A Lawyer's Perspective on U.S. Payment System Evolution and Money in the Digital Age,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, February 04, 2022, https://doi.org/10.17016/2380-7172.2964.
[6] The FCA notes that in the short term, Big Tech entry could increase incumbent payment firms’ (card schemes) incentives to innovate and offer better value payment services or lead to the introduction of new services such as peer-to-peer transfers.
[7] Instant payments are electronic retail payments that are processed in real time, 24 hours a day, 365 days a year, where the funds are made available immediately for use by the recipient. The report notes that these systems are “capable of handling higher volumes of transactions at lower cost than some current payment systems.”
