At a glance:
- This consultation gives valuable early insights into the FCA's approach to assessing the impact of Big Techs on competition in financial services.
- It also reaffirms the FCA's promise to play a proactive role in shaping the digitalisation of financial services and its commitment to work effectively with other financial services and cross-sector authorities to regulate digital markets.
- The consultation will give Big Techs an important and fairly detailed understanding of the FCA's current assumptions and concerns about their potential expansion into different financial services sectors.
- Financial services firms can leverage the FCA's analytical framework and scenarios to understand the opportunities and risks for their individual digital strategies and how best to engage with Big Techs as business partners, competitors, and third-party providers.
On Tuesday, 25 October, the FCA launched a consultation on the potential impact on competition arising from Big Techs' growing role in UK retail financial services. The FCA analyses the potential impacts of Big Techs' expansion, either as competitors or as partners of financial services firms, in four sectors: payments, deposit taking, consumer credit, and insurance.
While the FCA stops short of making any regulatory proposals, the consultation is a significant first step to informing the development of its future policy approach to digital markets. Critically, it also serves to reaffirm the FCA's commitment - despite all its other priorities and capacity constraints - to play a proactive role in ensuring digital markets support competition and innovation and deliver fair value to consumers.
Scope and analytical approach
The FCA defines Big Techs as "large technology companies with established technology platforms and extensive established customer networks" – without providing any qualitative or quantitative criteria for designation. It says its focus is on Big Techs operating in the UK, such as Google, Apple, Meta, and Amazon.
The FCA considers Big Techs' incentives and barriers to entering the four selected financial services markets, possible growth strategies, and associated benefits and harms to competition. It recognises that Big Techs' core activities and business models vary considerably, and they, therefore, face different opportunities and challenges concerning entry or expansion into financial services. However, the FCA also makes some overarching assumptions that it believes are relevant for all, or most, Big Techs. These include:
- Direct vs complementary value. Big Techs' multi‑product business models mean that their incentives to enter financial services arise not only from the direct market value but also from the complementary value entry generates for the firm's other products, services and ecosystem (e.g. data or customers).
- Conflicting commercial interests. Many Big Techs are also critical third-party providers to financial services firms (e.g. cloud services). Aggressive entry or expansion into financial services could drive retaliatory actions from these customers. Therefore, Big Techs will consider the impact of such strategies on their existing commercial relationships with financial services firms as part of their entry/expansion decisions.
- Competitor vs business partner role. Big Techs can consider several potential entry routes into financial services markets, including whether to act as a direct competitor to existing providers or collaborate with them through a range of commercial relationships (including embedded finance partnerships).
The FCA brings these considerations together in an analytical framework to help assess how the inherent characteristics of Big Techs and retail digital financial services could lead to positive and negative implications for competition in financial services (Figure 1)
Figure 1: Competition benefits and harm framework
The FCA applied the analytical framework described above to four financial services sectors - payments, deposit taking, consumer credit, and insurance. While details vary across the sectors, the FCA found some common emerging themes about whether and how Big Techs could enter or expand in financial services and how this may affect competition:
1. Strong complementarities make it likely that Big Techs will expand further into financial services.
Big Techs can grow and expand both within a specific sector and across multiple sectors because there are strong complementarities that enhance their incentives to do so. For example, Big Techs could expand their role in retail payments by supporting more payment use cases (e.g., crypto or peer-to-peer transfers or foreign exchange services). While it would require investment, it would strengthen the overall value of their ecosystem and potentially reduce the need for third-party apps.
2. Partnerships as key to growth in the short term.
The FCA analysis suggests the incentives for Big Techs to provide more complex financial services directly are less pronounced than in other markets such as China and South America. This could be due to competitive market dynamics, e.g., the prominence of credit cards and Faster Payments in the UK.
But the FCA believes the regulatory environment is also a significant factor. For example, Big Techs hold some limited activity-based regulatory permissions in the UK (Table 1). So far, their primary focus has been on payments and e-money services and Buy-Now-Pay-Later products, with some forays into insurance distribution via partnerships with regulated insurers. However, none hold a full entity-based regulatory authorisation as a deposit-taker or insurer, which would involve much greater regulatory scrutiny and compliance costs. Partnering with existing regulated financial services providers - and letting them shoulder the bulk of the regulatory responsibility - is therefore likely to remain their preferred entry strategy. Our recent report on embedded finance explores the strategic regulatory enablers and challenges of such partnerships.
However, longer-term, the FCA does not exclude the possibility that some Big Techs may want to be authorised as a deposit-taker or insurer in their own right once they have developed better regulatory and sector expertise.
Table 1 – Big Tech Permissions for UK Financial Services
3. Acquisitions as a pathway to growth, subject to regulatory interventions.
Big Techs may expand their direct role by capturing more of the financial services value chain through strategic acquisitions. However, this strategy will need to consider policy development of the new UK pro-competition regime for digital markets, which the Digital Markets Unit at the Competition Markets Authority (CMA) will have statutory powers to oversee, subject to legislation being passed by Parliament. In addition, the CMA's recent revisions to how it assesses mergers - e.g. giving more weight to how competition may develop in the future or non-price factors - could also create challenges for Big Techs' acquisition strategies in the more immediate term.
4. Competitive pressures: short-term vs long-term.
In the short term, the FCA recognises that Big Tech firms' entry into financial services could create positive competitive pressures. Partnerships with existing financial services providers could increase operational and technological efficiencies, lower prices, as well as providing consumers with more inclusive and innovative services. Where Big Techs provide financial services directly, they could create incentives for incumbent financial services firms to innovate and embrace digital technologies and distribution.
In the long term, however, Big Techs could lessen competition in two ways. First, by locking consumers and merchants into their ecosystems and acting as gatekeepers controlling access to financial services. Second, through their unparalleled access to consumer data, as either data providers to incumbents and new entrants or by using financial and other data themselves (or restricting access to others) to harm competition.
Final considerations and next steps
This FCA consultation focuses on Big Techs and competition. However, it forms part of a much broader set of policy initiatives relevant to Big Techs and digital markets that the FCA is developing with other financial services and cross-sector regulators. These include the proposed oversight regime for Critical Third Parties in collaboration with the Bank of England and the FCA's joint work with the Digital Regulation Cooperation Forum on online and algorithmic harms.
Finally, any FCA policy in this area will also have to consider how it will interact with the new UK and international competition regimes for digital markets and cross-sector data-sharing regulatory initiatives. For example, the EU Digital Markets Act (DMA), set to enter into force on 1 November, introduces ex-ante measures to limit anticompetitive behaviour by gatekeeper platforms. We believe the DMA could – amongst other things – help facilitate competition in mobile payments and digital financial services more broadly, if effectively implemented and enforced. While the DMA will not apply in the UK, it will still serve as an important reference point for future UK policies. If the DMA succeeds in levelling the playing field in digital markets, and the UK does not follow suit, then financial services firms operating in both jurisdictions may see the EU as a more attractive location to invest in digital financial services.
The consultation will close on 15 January 2023. The FCA plans to publish a feedback statement in the first half of next year, which will set out initial proposals for its regulatory competition approach to Big Techs.