Apple, Google and Amazon (and to a lesser extent, Meta) have been tentatively expanding into the financial services sector for years now. It has been very interesting to watch their strategies and it seems things are hotting up.
Damien and I wrote an article on this topic, which was published in the European Competition Journal last year.
The FCA’s role in digital markets
The UK’s financial regulator, the Financial Conduct Authority (“FCA”), has announced a programme of work on the issue and is inviting input from interested parties. It has published a discussion paper on the Big Tech firms’ impact on four retail sectors: payments, deposit taking, consumer credit and insurance.
There are various directions in which the FCA’s work could go. For example, it could feed into the rules under the forthcoming Digital Markets Unit (“DMU”) regime, it could lead to regulatory action or rule-making by the FCA itself, or it could refer the issue to the Competition and Markets Authority (“CMA”) for a full market investigation at the end of which the CMA would use its order-making powers.
It is notable that some of the big issues that have paved the way for the DMA and DMU regimes are very relevant to financial services – for example, Apple’s denial of third-party access to its near-field communications chip, and Apple and Google’s restrictions on app developers’ ability to use competing payments providers. Yet, the FCA has not been at the forefront in the area until now. It did not even join the Digital Regulation Co-operation Forum when it was first set up.
The FCA has a large competition team and it has the same full legal powers to enforce the competition rules as the CMA. It also has its own wide-ranging regulatory powers. Perhaps now the FCA will start having more of an impact in digital markets.
Big Tech’s financial services activities
The four firms’ financial services activities are still a minor part of their businesses, and they seem to retreat as often as they progress. However, there have been some notable recent product launches from Apple and Amazon. To summarize:
- Apple has recently announced a partnership with Goldman Sachs for a savings account in the US, to add to its existing credit card and cash transfer products in the US. It also offers its Apple Pay payments product worldwide and has announced a buy-now-pay-later product. It offers aftermarket breakdown insurance for its devices.
- Amazon has announced its entry into offering price comparison services for insurance products in the UK (where such services are popular). It already offers a buy-now-pay-later product in partnership with the British bank, Barclays, as well as a credit card, certain insurance products, small business loans, and a payments product.
- Google has arguably been less successful in financial services thus far. Its own price comparison service was discontinued in 2016, and it backed away from its current account product about a year ago, but it offers its payments product Google Pay worldwide and a cash transfer product in the US. It seems unlikely that this is the end of Google’s financial services ambitions.
- Meta tried to build its Diem (previously known as Libra) digital currency, but that seems to have been shelved. It has plans for Meta Pay to act as a digital currency in the metaverse.
In FCA terms, all four firms have some payments permissions, and Google and Meta also have some e‑money permissions. Apple and Amazon have some consumer credit and insurance permissions.
The four firms seem unwilling to become fully regulated banks (e.g., they cannot take deposits or issue mortgages). But, perhaps they have reached such a large size whereby, if they want to continue growing, they cannot ignore a significant and potentially lucrative sector such as financial services that is in many ways adjacent to their existing business activities. They seem to be entering markets through partnerships with regulated financial services firms, although Apple’s buy-now-pay-later product is an exception because Apple says it will be holding the loans on its own balance sheet.
In last year’s article, Damien and I argued that consumers can benefit from the innovations of the Big Tech firms and others without suffering the long-run effects of their further accumulation of market power. However, new rules should ensure that they do not benefit from an asymmetry of regulatory obligations whereby they are not subject to the same rules as their financial services competitors. They should not be able to leverage their market power from core activities into financial services such that their financial services competitors are hindered in reacting to their competitive threat.
The FCA’s proposed work is very much in line with our recommendations. For example, it is concerned that, “if Big Tech firms can exploit their ecosystems by attracting consumers to their financial services products, and later lock consumers in, this could be a credible way to gain market power and use it to lessen competition and harm consumers. Across all four sectors that we have studied, Big Tech firms may be able to lock consumers into their ecosystems, thus reducing competition.”
The FCA is also concerned about, “the access to, and use of, consumer data” whereby “Big Tech firms may be able to act as data providers to incumbents and fintechs, and potential entrants, in existing financial services” and also, “Big Tech firms may use financial services and other data themselves in ways which harm competition and consumers.” The FCA says it would “be 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. Big Tech firms’ access to unparalleled data, and an ability to combine data across their ecosystems provides them with a unique competitive advantage that incumbents and fintechs do not possess.”
The FCA concludes that, “[i]n 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 financial sector (including the fintech sector) is of huge importance to the UK economy, so it would not be surprising if the DMU focuses to a greater extent on financial services than the EU’s Digital Markets Act (“DMA”) does. The proposed structure of the DMU, whereby each gatekeeper firm will be subject to its own bespoke code of conduct, will be well suited to preserving a level playing field in these activities. The regime would benefit from the FCA’s insights. And these insights will be useful internationally too.
Industry players such as banks, payments firms and fintechs should make their views known to the FCA, especially if they are in the four retail sectors highlighted by the FCA: payments, deposit taking, consumer credit and insurance. If they do not, the risk is that the Big Tech firms will eventually take over the most lucrative parts of their industry and use their gatekeeper positions to disintermediate them from their customers.