With the increasing prevalence of Big Tech firms in UK financial services and their potential to expand further, the FCA has published a discussion paper (DP22/5) on the potential competition impacts of their entry and expansion in retail financial services. The FCA is seeking views on the potential benefits and harms to competition from Big Tech firms to help how it should develop a competition approach to digital markets. No regulatory changes are yet being proposed at this stage but this step could be the precursor for change or indeed enforcement activities.
With the much-heralded arrival of Big Tech firms in the UK financial sector, such as Google (Alphabet), Apple, Facebook (Meta) and Amazon, there are growing concerns that they may seek to exploit their positions in their base markets and scale up quickly to operate at different levels of the financial ecosystem, relying on their larger user bases. (Read our earlier paper on ‘Increased competition scrutiny of payments markets: Emerging trends in Europe’ for more.) Similar issues have been considered by the Dutch and French competition authorities in the last few years. (Read our earlier blog post here on the Dutch market study.)
The FCA notes that in the short term, by combining financial services with their existing businesses, Big Tech could help increase competition and reduce costs for consumers. New competition from US companies could also stimulate traditional financial services firms in the UK to embrace digital technologies more quickly. However, in the longer term, reflecting concerns across the digital economy more generally, the FCA also believes that Big Tech could present competition risks if they are able to grow their market share and exploit their significant market power. Entry into financial services could provide the big tech companies with even greater control and use of user data or tie or bundling these services with their core businesses.
The paper focuses on the effects of potential expansion in four retail sectors: payments, deposit-taking accounts, consumer credit and insurance. The FCA has focused on these areas given their importance to consumers’ financial livelihood and the potential (positive and negative) effects of Big Tech firms’ entry and expansion. The table below provides a summary of the FCA’s analysis on each of these sectors.
Sector and Big Tech entry scenarios | Short-term benefits | Long-term risks |
Payments
| Big Tech firms could drive low-cost take up, secure a strategically important role in payment networks and increase incumbent firms’ incentives to innovative and offer better value payment services. | Competition risk may emerge were the market to evolve so that Big Tech firms 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. |
Deposits
| Big Tech firms could overcome scale, brand and consumer disengagement barriers which could affect competition in the PCA market. | Competition risks may emerge were the market to evolve so that Big Tech firms control a significant pool of deposits, creating the potential for market power. |
Consumer credit
| Could help consumers make more effective decisions by driving improved security and convenience. Could lower search and switching costs by putting competitive pressure on existing providers to lower prices. With access to data as well as AI and ML capabilities, it may result in the development of innovative creditworthiness and affordability models. | 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 superior product, leading to poor choice and higher prices for consumers. If Big Tech firm’s data because a key input to CRAs, then it could gain a competitive advantage in the credit information market by restricting access to this data and technology. |
Insurance
| Could lead to beneficial changes of the value chain through: access to predictive technologies; creation of new origination channels for newer forms of insurance; and lower search and switching costs. | Competition risks may emerge if the market evolved such that data gathered by Big Tech firms is negatively used in insurance underwriting, therefore impacting access to insurance for specific cohorts of consumers. |
Conclusions
The FCA finds the following five common themes emerging:
- Further growth and expansion from Big Tech firms is likely to emerge given strong complementarities with their existing businesses.
- In the short term, due to costs, partnering with incumbents who take on the regulatory responsibility is likely to be the preferred route for Big Tech firms to enter and expand in financial services. In the longer term, they may seek to rely less on partnerships and compete more directly with existing firms.
- In the medium-to-longer term, Big Tech firms may choose to enter financial services more directly by attempting to capture more of the value chain, such as by acquisitions.
- The entry of Big Tech firms in the financial services value chain could result in positive competitive pressures, such as lower prices and better provision of services for consumers. It may also help to increase access for consumers and spur on additional innovation in existing markets.
- Longer term, Big Tech firms may be able to lock consumers into their ecosystems, thus reducing competition, and worsen consumer outcomes. The FCA would be particularly concerned if data can be used exclusively by Big Tech firms who are also able to place data access restrictions on incumbent providers or potential entrants.
Next steps
The FCA is inviting responses by 15 January 2023 and will be hosting an expert panel event on 28 November, followed by sector specific workshops on 6 and 7 December.
The FCA plans to publish a feedback statement in the first half of 2023 setting out how it will develop its regulatory approach.
On 6 October 2022, Ofcom launched a market study into the UK’s cloud sector, examining the position of Amazon, Microsoft and Google in cloud services. It will also start a broader programme of work to examine other digital markets and services, such as WhatsApp, Zoom and smart speakers.
The discussion paper (DP22/5) is available here.
The FCA’s press release published on 25 October 2022 is available here.
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