Big Tech’s potential impact on retail financial services

The FCA has launched a discussion paper seeking views on the potential impacts of Big Tech's entry into retail financial services. More specifically, the paper aims to inform the regulatory approach to Big Tech firms in the context of the new UK pro-competitive regime for digital markets and the new Consumer Duty.

As we discussed in our previous article, the past decade has seen a dramatic transformation of the digital finance landscape. One of the most notable changes has been the entrance of 'Big Tech' players. Big Tech is defined by the Financial Stability Board (FSB) as large digital companies with established technology platforms and extensive established customer networks — the FCA references firms such as Facebook (Meta), Google (Alphabet), Apple and Amazon. Unlike traditional financial services firms, which are designed to operate exclusively within the financial services domain, some Big Tech firms are choosing to develop and distribute financial products as part of their wider portfolio of existing activities.

Big Techs benefit from network effects and their access to consumer data. In financial services, such firms could combine their well-established consumer datasets with financial data to bundle and deliver products that traditional firms cannot replicate. This can lead to the development of innovative services for consumers and healthy competition with incumbent providers. However, greater user activity in turn generates more data, opening the door to potentially monopolistic behaviour.

The FCA's paper aims to provide an impartial view of both potential benefits and harms of Big Techs' entrance into the financial sector. It stops short of pitching the sort of measures proposed by the Bank of International Settlements (BIS) earlier in the year — which included proposals for Big Tech firms to merge their financial activities into a single entity that authorities can scrutinise.

The FCA is not the only body looking at the competition issues arising around Big Tech. In the UK, powers assigned through the proposed Digital Markets, Competition and Consumer Bill will allow the Digital Markets Unit in the Competition and Markets Authority to designate Big Tech firms as having 'Strategic Market Status'. These firms would then be obliged to comply with a mandatory code of conduct and avoid abusing their dominant positions at the expense of consumers and other businesses.

In the EU, from May 2023, online platforms that qualify as 'gatekeepers' under the Digital Markets Act will need to comply with a series of obligations such as preventing consumers from linking up to businesses outside their platforms.

Currently in the UK, Big Tech firms have FCA permission to provide some retail financial services such as payments, consumer credit and insurance. None have permission to provide deposit services, mortgages or pensions.

The paper's analysis focuses on four vital retail sectors: payments, deposit taking, consumer credit and insurance. Across the sectors, five key themes were found to be emerging:

1. Potential for Big Tech firms to enhance the overall value of their ecosystems with further entry and expansion in to retail financial services sectors through innovative propositions.
2. In the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term they may seek to rely less on partnerships and compete more directly with existing firms.
3. Big Tech firms' entry may not be sequential or predictable. While initial forms of entry may be hard to predict, once momentum builds, significant market changes may occur quickly.
4. In the short-term and possibly enduring longer, Big Tech firms' entry in financial services could benefit many consumers. These benefits might include innovative new product offerings, with significantly better customer experience and with highly competitive pricing driven by increased efficiency. This could deliver healthy competition with incumbent financial services providers.
5. 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.

The FCA report that card payment accounted for 80% of retail sales by value in the UK in 2020, with Visa and Mastercard processing 99% of volume. The Payment's System Regulator's (PSR) concerns around competition has led it to launch a market review of card schemes and processing fees. Separately, the FCA found that in the short term, Big Tech firms' entry into payments, via methods such as digital wallets, 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. However, in the longer term, a 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 such as digital wallets.

The 'Big 4' banks in the UK hold two-thirds of personal current accounts. The FCA's Strategic Review of Retail Banking Business Models identified significant room for increases in competition and innovation. In the short term, Big Tech firms' entry via partnership with an e-money firm or as an e-money institution, could overcome scale, brand, and consumer disengagement barriers which affect competition in the personal current account market. In the long term, a competition risk may emerge were the market to evolve so that Big Tech firms control a significant pool of deposits, creating the potential for market power.

The Consumer Credit market is evolving. Alongside use of overdrafts, credit cards and personal loans there has been significant growth of unregulated Buy Now Pay Later products due to the increased popularity of online shopping and flexible payment options. Big Techs, in their existing roles as credit brokers, could help consumers make more effective decisions by driving improved security and convenience as well as information and analytics. As providers of credit products to facilitate purchases on their own platforms, Big Tech could put competitive pressure on existing providers to lower fees (interest rates) and increase quality (improved terms and conditions). However, in the long term across both types of service, 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.

The FCA has identified that Big Techs are likely to enter into the insurance market as either a marketplace (e.g. price comparison websites) or a broker— see Amazon's foray into home insurance. In the short term, this could be beneficial to customers as Big Techs could use observed consumer data to personalise recommendations and increase competitive pressure on existing providers. Another mode of entry could be as provider of data or business services, for example as a provider of consumer data to underwriters. Although these services currently fall outside the FCA's regulatory perimeter, the FCA has identified that in the long term, 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.

Incumbent financial services firms may be interested to read the detail of the FCA's analysis of how Big Tech may challenge their business models. There may also be challenges to Fintech firms. No regulatory changes are being proposed at this stage, with the paper aiming to stimulate discussion to inform the FCA's regulatory approach.

The FCA will host a panel event on 28 November, followed by sector-specific workshops on 6 and 7 December.

Responses to the Discussion Paper are due by 15 January 2023.

A feedback statement will then be published in first half of 2023, setting out how the FCA will develop a regulatory approach in response.

Separately, regulators are also considering the impact of Big Tech firms as critical third party service providers in financial services — summarised in our article here. Although individual firms ultimately remain accountable for their resilience, regulators are now stepping in with measures that specifically target third party resilience.