Is the hammer about to fall on Big Tech FCA discussion paper
18 November 2022
18 November 2022
The FCA has published an important discussion paper on the competition impacts of Big Tech entry and expansion in retail services. We take a look at the key issues below.
There has been increasing regulatory scrutiny at the national, EU and global level into the operations of so-called Big Tech firms and the impact of the activities of Big Tech indirectly on financial services (as critical third parties) and directly as they enter into financial services arena and start offering services in payments and consumer credit. These concerns centre on competition, financial stability and operational resilience.
As so-called critical third parties providing critically important services to regulated entities, Big Tech firms, particularly cloud infrastructure providers, will be subject to increased regulatory oversight via provisions in the Financial Services and Markets Bill 2022-23 (see our briefing here), as well as other regulatory rules foreshadowed in the July 2022 discussion paper issued by UK regulators (see our briefing here). At the EU level, EU legislators are finalising an oversight framework for CTPs via the Digital Operational Resilience Act (see our briefing here).
In October 2022, the Bank of International Settlements issued a discussion paper on a regulatory framework for Big Tech in light of increasing debate. At the EU-level, concerns about the role of so-called gatekeeper online platforms, i.e. digital platforms with a systemic role in the EU internal market functioning as bottlenecks between businesses and consumers for important digital services, have led the EU to introduce the Digital Markets Act (DMA) (see briefing here).
The FCA also has some concerns in this area and wants to encourage discussion. It comments that Big Tech firms’ presence in UK financial services markets has been increasing and has the potential to grow quickly. It wants to better understand the emerging risks and opportunities to ensure important harms mitigated.
The FCA is using the definition employed by the FSB and is defining Big Tech as large digital companies with established technology platforms and extensive established customer networks. The FCA is focusing on the largest digital players in the UK – e.g. Google (Alphabet), Apple et al, as they have already entered financial services. The paper notes that Big Tech firms often operate with "diversified ecosystems across multiple business lines" (e.g. search, advertising, e commerce, social media, virtual reality, and cloud infrastructure). It comments that success in this area is down to a number of factors including the global scale of Big Tech firms and their access to a large installed user base and rich data about their users. It adds that this enables personalisation, advanced data analytics and technology.
The paper states that no Big Tech firm yet has permissions to provide products and services in deposits, mortgages or pensions. The FCA notes that Big Tech firms would not need permissions to be indirectly active in financial services where they were involved in the provision of third party services (e.g. cloud infrastructure).
According to the discussion paper, Big Tech firms have some FCA permissions to conduct business in retail financial services with most having some payments permissions, and a couple also having some e money permissions, consumer credit and insurance permissions (digital wallets such as Google Pay and Apple Pay). The discussion paper notes that entry can be gained in a variety of ways.
The discussion paper differentiates between entry as a direct competitor to existing providers and entry through collaboration. The FCA comments that Big Tech firms may be able to surmount entry barriers that other challengers may not, but could also undermine competition and consumer outcomes if harmful market power is the result.
The FCA wants views from stakeholders in light of further possible expansion of Big Tech into financial services. Although these entities can provide innovative, efficient products and services, the FCA thinks that there are competition risks arising from them rapidly gaining market share, markets "tipping" in their favour, and potential exploitation of market power".
The focus of the paper is on Big Tech firms’ potential impacts on competition in retail financial services markets, although the FCA will have some regard of wholesale markets and the wider infrastructure provided by Big Tech firms to financial services, where they have direct implications for the retail markets under consideration.
The possible benefits of Big Tech to consumers identified in the discussion paper include: assisting consumers to make more effective decisions by improving security and convenience; Big Tech developing innovative risk and affordability models, reducing the need for collateral and potentially promoting financial inclusion; and putting competitive pressure on existing providers to compete for customers by allowing users to compare alternative credit providers with lower search and switching costs.
The FCA's approach assumes that long term costs and benefits of entry to the firm have a decisive impact on Big Tech firms’ entry decisions, adding that markets with a high long-term profitability potential and low costs of entry will be the most attractive options for Big Tech firms. The paper argues that the value of the new market itself may not always be a decisive factor, with the complementary value it generates for a firm’s other products, services and ecosystem likely to be a key consideration. The FCA comments that Big Tech firms’ existing commercial relationships and competitive dynamics with incumbent financial services providers are also likely to influence entry decisions.
The paper then examines plausible Big Tech entry/expansion strategies in the UK in four UK financial services sectors: payments, deposit taking, consumer credit and insurance.
According to the discussion paper, there are two major card schemes in the UK: Visa and Mastercard. Modes of entry into the payments sector identified include the following: Big Tech firms could intermediate beyond their existing offering (digital wallets) to provide more services across card schemes and capture more of the value chain; Big Tech firms could facilitate the adoption of non-card payment systems to compete with the card schemes directly; and Big Tech firms could widen the scope beyond retail payment products through digital wallets. The short term impact for payments identified is that Big Tech firms’ entry could drive low-cost take-up, secure a strategically important role in payment networks, and increase incumbent firms’ incentives to innovate and offer better value payment services. The paper argues that in the long term, a competition risk may emerge if the market evolves in such a way that Big Tech firms control access (and data) to a significant portion of transactions (consumers and merchants) through their grip of key mobile gateways.
The FCA notes that the current "Big 4" banks account for about two thirds of personal current accounts (PCAs), adding that increased rate of digitalisation and other factors have helped new entry. Modes of entry into this sector include the following: a Big Tech firm could enter as a distributor in partnership with a deposit taking or e money issuing firm or, in the longer term, as an open platform/marketplace matching the Big Tech firm’s user base with a range of competing deposit taking institutions; and a Big Tech firm could enter as an e-money institution, directly providing an e-money account to consumers. The FCA comments that in the short term, Big Tech firms could overcome scale, brand, and consumer disengagement barriers affecting competition in the PCA market. The paper argues that in the long term, a competition risk may arise if Big Tech firms end up controlling a significant pool of deposits, creating the potential for market power.
The paper identities three plausible entries for Big Tech firm in this sector: entering as a credit broker (the paper notes that some are already doing this, making use of their large user base to introduce consumers to credit cards or to finance partners); entering as a provider of Buy Now Pay Later/alternative credit products to facilitate purchases on its own platforms, taking advantage of user data and purchase history as a simple form of credit reference; and entering as a credit reference agency (the paper notes that Big Tech firms have data on behaviour and past purchases that may enable them to create a credit score with significant predictive power and coverage).
The paper identifies the short to medium impacts as follows: Big Tech entry could help consumers make more effective decisions; Big Tech entry could lower search and switching costs; and Big Tech firms’ access to data, as well as their artificial intelligence and machine learning capabilities, may result in the development of innovative creditworthiness and affordability models. The paper states that the longer term competition risk is that in broking or BNPL provision, a Big Tech firm could gain market power by leveraging its user base from its digital wallet or online marketplace, without necessarily having the best product; and Big Tech could gain a competitive advantage in the credit information market by restricting access to this data and technology.
The FCA sees five key themes emerging: the 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; Big Tech firms’ entry may not be sequential or predictable (initial forms of entry may be hard to predict, once momentum builds, significant market changes may occur quickly); in the short-term and possibly enduring longer, Big Tech firms’ entry in financial services could benefit many consumers; and 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.
UK regulatory bodies have been looking into online safety and competition in digital markets. The UK has set up the Digital Markets Unit within the CMA and this body will, in the future, be coming up with a code of conduct and will have power to intervene in cases where firms hold "strategic market status". A UK report published on the same day as the FCA paper on Big Tech urged the Government to press on with the Draft Digital Markets, Competition and Consumer Bill (the UK version of the EU DMA) as indicated/referred to in the 2022 Queen's speech in light of concerns about competition in this area.
FCA will consider feedback and intends to publish a Feedback Statement in the first half of 2023.