The FCA has issued a discussion paper on the competition impacts of Big Tech on the financial services industry. It says that Big Tech firms’ presence internationally and in UK financial services markets has been increasing with the potential to grow and change market outcomes quickly. It says that Big Tech firms can bring benefits to consumers of retail financial services by effectively and fairly competing with incumbent providers, and other new entrants including fintech firms. They can provide innovative, efficient products and services. However, based on evidence from Big Tech firms’ core markets their expanding ecosystems, competition risks could arise in the future from them rapidly gaining market share, markets ‘tipping’ in their favour, and potential exploitation of market power that would be harmful to competition and consumer outcomes.
The FCA wants to stimulate a discussion on the potential competition impacts identified using existing research to inform its approach to Big Tech firms. It wants to know about areas where Big Tech entry may create the biggest competition benefits for consumers and those areas where this is the greatest risk of significant harm if competition develops in a particular way. It seeks to understand what its approach to Big Tech should be in the future as part of its commitment to shape digital markets.
It is focusing on four retail sectors: payments, deposit taking, consumer credit and insurance. This is due to their importance to consumers’ financial lives and the potential competition impact Big Tech firms’ entry and expansion could have on them. This complements wider joint work by the FCA on online safety, consumer protection and financial stability in digital markets such as:
- Its joint work with the Prudential Regulation Authority and Bank of England on operational resilience and the role of critical third parties such as cloud services provided by Big Tech firms to support financial stability and growth.
- Its joint work with Ofcom through the Digital Regulation Cooperation Forum on online safety and financial fraud to protect consumers from scams.
Five key themes have arisen in the four sectors overall:
- Potential for Big Tech firms to enhance the overall value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions.
- 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.
- 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 might occur quickly.
- In the short-term and possibly longer, Big Tech firms’ entry in financial services could benefit many consumers. These benefits could arise from Big Tech firms’ own innovations as well as increasing other market participants’ incentives to innovate, improve quality and reduce prices of financial products and services through increased competition.
- 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. This risk can arise given the characteristics of digital markets (including economies of scale and scope, limitations to switching and multi-homing, incumbent data advantages and network effects) and the characteristics and behaviours of Big Tech firms (including global scale and large user bases, rich data about their users with advanced analytics and technology, influence over decision making and defaults, ecosystems of complementary products and their strategic choices and investments).
The consultation ends on 15 January 2023. The FCA plans to publish a Feedback Statement in the first half of 2023, setting out its response and how it will develop its regulatory approach in response to the feedback received.
