Big Tech is uniquely placed to introduce welcome competition to the financial services sector, disrupting incumbents and benefitting consumers across the financial ecosystem. Yet, linked to concerns about tipping effects in digital markets, regulators worry about the potential for these companies to rapidly scale up and potentially exploit market power. Linklaters partner Jonathan Ford and senior associate Simon Treacy explore the UK financial regulator’s initial thoughts on the convergence.
The arrival of large technology companies into financial services has been well-heralded and they have already become active players in some markets. In a new discussion paper, the UK’s Financial Conduct Authority is attempting to better understand how the opportunities and risks of Big Tech’s entry and expansion into retail financial services should inform its response.
While the paper welcomes the benefits offered by Big Tech’s entry into the sector, particularly from an innovation standpoint, the FCA wants to balance the benefits from fair competition against the potential in the future for exploitation of market power.
In the longer run, it is concerned that a Big Tech company that manages to entrench its existing market power could have fewer incentives to innovate, improve service quality and lower prices and more incentive to engage in exploitative conduct.
The discussion paper closes on 15 January 2023 and a feedback statement is planned by the summer of 2023. But for the FCA, starting the discussion is the easy part. It has not indicated that it will necessarily make changes to its rules or policy, and judging the timing and extent of any market intervention will be hard. Act too soon and it could inhibit innovation; wait too long and market dominance could already be secured.
More generally, while the FCA’s paper is forward-looking, it remains focused on the relative short term. Beyond the next few years, the development of new digital realities such as the metaverse could have far-reaching impacts for the retail financial services market. Once again, Big Tech can only be expected to play a critical role, setting the rules of the game and posing another headache for competition regulators if firms tilt the market for their benefit.
The story so far
Google, Amazon, Meta Platforms/Facebook and Apple already provide financial services to UK customers. For example, as the diagram below explains, they all have a licence to provide regulated payment services. Amazon and Apple also have permission to provide regulated consumer credit – lending money to individuals – and some insurance products. Big Tech companies additionally offer unregulated financial services, such as buy-now pay-later (BNPL).
The regulatory burden in these areas is relatively light-touch in comparison to, say, deposit-taking or the provision of mortgages, which means lower barriers to entry. Expanding into other product areas would involve higher regulatory and compliance costs. That said, these Big Tech companies run diversified business lines and further entry into financial services may be driven not just by the value of the new market but also the complementary value it generates for the company’s other products and services.
Asia provides an example of how Big Tech could shape the UK financial services market in the future. Ant’s Alipay and Tencent’s WeChat secured the digital payments market in China and have since expanded their marketplaces to include a wide range of financial services.
Given that Big Tech already has a firm foothold in the UK sector, the FCA’s paper speculates how they could further expand their reach into new markets. With their established platforms and extensive customer base, these companies benefit from network effects and unrivalled access to customer data. In financial services, these advantages could translate into rapid gains in market share, especially as entry into one market creates opportunities in adjacent markets and momentum builds.
The FCA recognises that the four major technology companies operate different business models – Apple is widely referred to as operating a closed system, for example, while Google is generally more open – and this will impact their respective incentives to enter and expand into different financial services markets.
Payments is one of four sectors that the FCA analyses in its paper, with the others being deposits, consumer credit and insurance, and is arguably the most prominent area that Big Tech has entered to date. Apple Pay and Google Pay allow users to make payment transactions from their devices, although these are treated as technology services rather than regulated activities, thereby increasing convenience for consumers. Apple and Google also collect commissions from transactions in their app stores.
Meanwhile, Facebook has integrated payments into WhatsApp in some countries and Apple Cash enables peer-to-peer transfer of funds via iMessage in the US. Amazon Fresh stores use “Just Walk Out” technology to charge customers. This innovation is largely built on existing payment rails but Facebook’s exploration into setting up its own currency, first called Libra and then Diem, is an example of how a Big Tech company could create a wholly new system for processing payments without card schemes – in that case, one based on crypto assets.
Pros, but also cons
This demonstrates some of the benefits brought by Big Tech’s entry and expansion in financial services. Several parts of the sector are dominated by a small number of incumbents, and fast-moving Big Tech disrupters could be the enabler for greater competition in these relatively concentrated markets. More competition tends to lead to more innovation and greater convenience and access for customers, particularly given Big Tech’s touchpoints with consumers.
Additionally, at a time of rising costs, innovation is seen as a way to overcome barriers to financial inclusion by reaching individuals who are less engaged in, or marginalised from, mainstream financial services. The threat of competition can also lower prices across the market as incumbents strive to retain customers.
As one of its operational objectives, the FCA is obliged to promote competition in the interests of consumers. It therefore welcomes the benefits offered by Big Tech’s entry into the sector. However, the FCA wants to balance the benefits from fair competition against the potential for the future exploitation of market power.
In the longer run, the FCA signals concerns that a Big Tech company that manages to entrench its existing market power could have fewer incentives to innovate, improve service quality and lower prices and more incentive to engage in exploitative conduct. In particular, the FCA worries about the potential harm to consumers, especially as it is in the process of introducing a new consumer duty that aims to improve the outcomes that companies deliver to their retail customers.
In particular, building on concerns in high-profile antitrust cases such as Google shopping and Amazon marketplace investigations, the FCA highlights the potential customer harm that could arise from bundling products together or self-preferencing.
For example, a Big Tech company selling goods on an online marketplace could direct customers towards its own BNPL product at the point of sale, or it could bundle deposit-taking with other parts of its platform to squeeze out other digital challengers from the market. A large technology company could also bundle insurance with the sale of other products in its ecosystem to the exclusion of other insurance providers, or at least those without a relationship with the Big Tech provider.
And a Big Tech company that becomes a gatekeeper to customer transactions could exploit market power to increase fees for intermediaries in the payments chain. This could lead to higher costs for making payment transactions impacting merchants and, ultimately, consumers.
Putting the puzzle together
The FCA is not alone in recognising the potential competition harms in this area. It is working with other UK regulators via the Digital Regulation Cooperation Forum (DRCF) to proactively shape digital markets, and its paper also echoes competition reviews in other jurisdictions.
Over the last few years, the French and Dutch competition authorities have both investigated how being active in digital payment services gives some Big Tech companies more power over customer data. At the international level, the Financial Stability Board and Bank for International Settlements have also researched the impact of and potential regulatory response to Big Tech’s involvement in financial services.
The EU’s Digital Markets Act is aimed at reining in the power of Big Tech companies, while the UK’s Digital Markets Unit awaits formal legislation. These regulatory innovations are largely designed to limit anticompetitive behaviour by so-called gatekeepers and introduce increased competition in digital markets. The reforms are designed to address a number of the same issues highlighted by the FCA, such as self-preferencing and bundling of services. Yet their efficacy and impact remains to be seen, particularly in areas where Big Tech is expanding its reach. Against this backdrop, it may be that this paper acts as a prompt for the FCA to identify any gaps unfilled by broader digital regulation.
