FCA’s Discussion on The Potential Competition Impacts of Big Tech

Entry and Expansion in Retail Financial Services (UK)

Summary

On the 25th of October 2022, FCA announced that[1] they are asking for public views on the potential benefits and harms that may arise from Big Tech firms’ entry and expansion into retail financial services sectors. On the statement, it was highlighted that Big Tech firms’ presence in UK financial services markets has been increasing and has the potential to grow quickly. Given the potential implications for consumers and competition, the FCA wants to better understand the emerging risks and opportunities to ensure that benefits to consumers are harnessed and important harms mitigated.

The purpose of this document is to stimulate a discussion on the potential competition impacts raised. The FCA wants to hear views about areas where Big Tech entry is likely to create the biggest competition benefits for consumers and those areas where there is the greatest risk of significant harm if competition develops in a particular way. This discussion is aimed to help inform their development of an effective competition approach for Big Tech firms in UK financial services that is coherent with the wider competition and regulatory landscape in the UK and internationally, as FCA stated.

One of the importance of this discussion is that it is one of the examples, where FCA approached a topic on the matter of competition impact.

On detailed discussion paper, in the background section, FCA defines Big Tech firms as ‘large technology companies with established technology platforms and extensive established customer networks’, following the definition by the Financial Stability Board (combining two sentences).

FCA also highlights that Big Tech firms are active in a range of other businesses which could impact their incentives to enter or expand in financial services. Big Tech has been referred to as tech or neo-conglomerates. Big Tech firms often operate with diversified ecosystems across multiple business lines such as, but not limited to, search, advertising, e‑commerce, social media, virtual reality, and cloud infrastructure with reference to the CMA’s (2022) Mobile ecosystems market study.[2]

In Big Tech firms’ presence in UK financial services, key developments are as follows[3]:

• Digital wallets such as Google Pay, and Apple Pay are among the most prominent payment technologies used by consumers.
• Amazon has acted as a credit broker in partnership with NewDay to offer credit cards to consumers, who earn Amazon Reward Points and gift cards (although NewDay has announced this arrangement is ending).
• Apple partners with Barclays to provide financing on Apple Store purchases and has recently acquired Credit Kudos, a UK‑based fintech credit reference agency.
• In insurance, Amazon provides business insurance in collaboration with SuperScript and offers general insurance products provided by London General Insurance Company on its e‑commerce site. Apple provides aftermarket breakdown cover for iOS devices (AppleCare) as a key insurance product.

FCA’s analytical approach to Big Tech entry and competition considers the following:

• The incentives and barriers Big Tech firms face when considering entry into new markets.
• The strategies Big Tech firms could use to enter new markets.
• The potential benefits and harms to competition.[4]

Potential Competition Benefits

In all cases, the entry of Big Tech, or the threat of its entry, has the ability to increase the level of competition, placing pressure on the status quo to enhance the customer experience, reduce prices, or innovate.

The scale, brand, and consumer disengagement obstacles that have impeded entry and competition in the PCA market may be overcome by big IT companies. If digital rivals have trouble creating a long-term sustainable business model, the pressure they have put on the "big 4" incumbent banks may decrease.

By entering the PCA market at scale and applying more sustained and prolonged competitive pressure to incumbent banks than digital disruptors, big tech businesses may be able to do so thanks to their user base, access to finance, data, and ecosystem benefits. 

Big Tech platforms or marketplaces could put pressure on current providers to compete for customers by offering lower fees and charges (or higher interest rates) and higher quality. These platforms or marketplaces allow users to compare alternative PCA or e-money providers with lower search and switching costs, and improved matching.

Entry may also alter the character of the competition or result in new pricing strategies. Despite the fact that the free-if-in-credit (FIIC) model has a nominal price of zero, clients may still be subject to fees, charges, rewards, and varying interest rates (which may become more significant in a higher interest rate environment).[5]

Potential Competition Harms

A Big Tech firm with entrenched market power could engage in exploitative conduct by setting high prices to business partners (such as high commission rates to access depositors) and reducing quality (such as lower quality customer service and reduced access to branch networks). They could also engage in exclusionary conduct, with the intention of preventing competitors from entering, growing, or remaining in the deposit-taking market. A Big Tech firm could attempt to keep its position by bundling its deposit-taking offering with other parts of its ecosystem.

Although digital challengers have gained market share in PCAs, the SRRB highlighted that digital banking does not appeal to all consumers and is likely to co-exist alongside other business models for the foreseeable future. Moreover, PCAs with digital challengers are more often secondary accounts, and more often held by (younger) consumers with smaller deposits, which makes them less profitable. A Big Tech entrant would be likely to face similar challenges.

Nevertheless, a Big Tech firm has advantages that may not be available to other firms in the market. In the future, if the primary role of PCAs is transactional (facilitating digital payments and transfers) and the costs of switching became very low, a Big Tech firm could operate a marketplace, where deposit takers compete for the Big Tech firm’s depositors.

Big Tech firms may also have competitive advantages[6] relative to incumbents through economies of scale and scope, data and technology advantages and potential cost synergies from operating digital wallets and payment services. Big Tech firms can also create additional consumer value by integrating PCA or e‑money accounts within their ecosystem of complementary products and services.

However, it seems plausible that some incumbents (and future market participants) can still exert a strong competitive constraint on Big Tech firms in the medium term.

Traditional large banks benefit from their own large customer bases, and their ability to differentiate themselves through brand recognition and trust, branch networks and, depending on what the Big Tech firm may offer in the future, the advantages of FSCS protection, interest payments, and close connection to complementary products such as insurance, mortgages, and credit. Digital challengers may find it harder to differentiate themselves from a Big Tech product.

If a Big Tech firm did succeed in creating entrenched market power through capturing a significant share of PCA customers, there is a risk that digital challengers could be forced from the market. Traditional retail banks could be left to serve high‑cost customers through their branch networks, potentially resulting in exit, branch closures (implying a reduction in access to cash) and a higher cost of banking for this portion of the market. As a result, a smaller volume of deposits would be available to incumbent banks, with implications for overdrafts, loans, credit cards and mortgage markets.

Overall, Big Tech entry, has the potential to increase the intensity of competition, putting competitive pressure on incumbents to improve the customer experience, lower prices or innovate in the short term or enduring longer. However, in the long term, a competition risk may arise if the market evolved such that a Big Tech firm gained entrenched market power controlling a significant share of deposits.

In the conclusion of the report, FCA highlighted the following point: [7]

The entry of Big Tech firms in the financial services value chain is likely to create two main types of positive competitive pressures. In situations where Big Tech firms are partners alongside incumbents in the value chain, the increased operational and technological efficiencies could result in lower prices and better provision of financial services. The entry of Big Tech firms as partners may also help to increase access for consumers who are currently digitally excluded via their large consumer bases.

For the next steps, FCA asked for comments on this Discussion Paper by 15 January 2023. The discussion period has ended on 15 January 2023. Following this, the FCA is now considering feedback and planning to publish a Feedback Statement in the first half of 2023.[8]

[1] FCA, announcement. (2022) DP22/5: The potential competition impacts of Big Tech entry and expansion in Retail Financial Services, FCA. Available at: https://www.fca.org.uk/publications/discussion-papers/dp22-5-potential-competition-impacts-big-tech-entry-and-expansion-retail-financial-services (Accessed: February 1, 2023).

[2] CMA, (2022) Mobile Ecosystems Market Study Final Report, GOV.UK. GOV.UK. Available at: https://www.gov.uk/government/publications/mobile-ecosystems-market-study-final-report (Accessed: December 28, 2022).

[3] FCA (2022) DP22/5: The potential competition impacts of Big Tech entry and expansion in Retail Financial Services, FCA. Available at: https://www.fca.org.uk/publications/discussion-papers/dp22-5-potential-competition-impacts-big-tech-entry-and-expansion-retail-financial-services (Accessed: February 1, 2023).

[4] ibid

[5] ibid (1)

[6] ibid (2)

[7] ibid (3)

[8] FCA, announcement. (2022) DP22/5: The potential competition impacts of Big Tech entry and expansion in Retail Financial Services, FCA. Available at: https://www.fca.org.uk/publications/discussion-papers/dp22-5-potential-competition-impacts-big-tech-entry-and-expansion-retail-financial-services (Accessed: February 1, 2023).

References

• CMA, (2022) Mobile Ecosystems Market Study Final Report, GOV.UK. GOV.UK. Available at: https://www.gov.uk/government/publications/mobile-ecosystems-market-study-final-report (Accessed: December 28, 2022).
• FCA, announcement. (2022) DP22/5: The potential competition impacts of Big Tech entry and expansion in Retail Financial Services, FCA. Available at: https://www.fca.org.uk/publications/discussion-papers/dp22-5-potential-competition-impacts-big-tech-entry-and-expansion-retail-financial-services (Accessed: February 1, 2023).
• FCA (2022) DP22/5: The potential competition impacts of Big Tech entry and expansion in Retail Financial Services, FCA. Available at: https://www.fca.org.uk/publications/discussion-papers/dp22-5-potential-competition-impacts-big-tech-entry-and-expansion-retail-financial-services (Accessed: February 1, 2023).

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Tagged with: Technology, Google, Apple, Competition