Maintaining a level playing field when Big Tech disrupts the financial services sector

Hello from me to all Platform Law Blog subscribers!  I joined Geradin Partners last week, based in London.  I hope I can help the team shed light on some of the complex and fascinating issues that the blog covers.

To kick off, Damien and I have written an article analysing the expansion of Google, Apple, Facebook and Amazon (the GAFAs) in financial services, which is published in the European Competition Journal. 

The GAFAs’ financial services activities

The article assesses the GAFAs’ gradual expansion in financial services markets through initiatives such as Google’s Plex account and its licence to offer payment initiation services in the EU, Apple Pay and Apple Cash, Facebook’s Diem, and Amazon’s partnership with Goldman Sachs to provide credit lines. 

We infer that the GAFAs do not want to become fully-fledged banks, at least for the time being.  They have been more focused on payments products than banking products.  As you would expect, they seem to be encroaching on a new sector the same way they always do it – they grow from their positions of strength into neighbouring activities, offering existing customers an enticing (often free) additional service.  This is the way, for example, Facebook launched its dating and marketplace services or Google expanded into the browser, specialised search and AdTech sectors.  In doing so, the GAFAs gain access to a greater volume of useful data, which enables better knowledge of their customers and, for Google and Facebook, better targeted advertising. Their ecosystems are expanded, their core activities are better protected, and they occupy an ever more strategic position in modern society.

The impact on competition

From a competition policy perspective, the increased competition for customers brings immediate benefits. Indeed, the rise of fintech companies and the prospect of the GAFAs’ entry has arguably already helped to fuel banks’ and payments providers’ innovation in recent years.  On the other hand, there are some significant competition issues that arise from the GAFAs’ expansion into new markets.  These issues can be grouped into two broad headings: (i) asymmetry of regulation, and (ii) ecosystem effects and the leveraging of market power into new markets:

  • Asymmetry of regulation

This issue has occurred in multiple markets, whereby the GAFAs avoid the rules that apply to their competitors and therefore operate with more freedom and lower costs.  The article discusses, for example, Google and Facebook’s distribution of news, their provision of communication services through a variety of apps, the current interpretation of data protection law, and the UK Financial Conduct Authority’s public frustration at not being able to force Google to remove misleading financial promotions.

We discuss how problem of regulatory asymmetry could apply to a greater extent in financial services than in other sectors because it is subject to extremely detailed regulatory requirements.

  • Ecosystem effects

The article then analyses a broad range of conduct that enables the GAFAs to expand their market power from their core activities into new activities.  These include many of the practices that will be familiar to regular readers of this blog:  lack of interoperability, self-preferencing, leveraging, network effects, tying and cross-subsidisation.

The appropriate regulatory response

The problems discussed above are not insurmountable.  We argue that the emerging UK and EU regulatory regimes aiming to curb the GAFAs’ market power can ensure that consumers will benefit from their innovations in financial services without suffering the long-run effects of their further accumulation of market power.  To achieve that, the new rules would ensure that:

  • the GAFAs do not benefit from an asymmetry of regulatory obligations whereby they are not subject to the same rules as their financial services competitors (including retail banks and fintech companies); and
  • the GAFAs cannot leverage their market power from their existing core activities into financial services whereby their financial services competitors are hindered in reacting to the GAFAs’ competitive threat.  There are some complex but achievable remedies available to the authorities, which would deal with issues such as interoperability, self-preferencing, leveraging, tying, cross-subsidisation, transparency, data portability, and the restriction of payments for defaults.

We finish the article by reminding readers that antitrust enforcement and merger control will still have a part to play.

If regulators act carefully, they can ensure a level playing field on which the best innovator wins, not just the innovator who owns the consumer access points.  As we move into the next phase development for the UK’s Digital Markets Unit and the EU’s Digital Markets Act, we hope these issues will be taken into account.

We hope you enjoy reading the full article.  As always, we welcome feedback.  Let us know if you want to discuss these issues.

[Disclosure:  Geradin Partners advises a number of tech businesses interested in these matters.  Tom was until recently Legal Director at the CMA, leading the legal team on its digital work and previously on the retail banking market investigation that implemented the Open Banking rules in the UK.]

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