As multinational technology companies increase their presence within traditional financial markets, regulators have been forced to analyse the economic incentives driving entry into these areas and the potential impacts of increased competition and innovation.
In the FCA’s latest discussion paper, ‘Big Tech’ firms are described as “large digital companies with established platforms and extensive established customer networks”. In particular, the FCA focuses on companies that provide retail financial services to U.K consumers – with Facebook (Meta), Google (Alphabet) and Amazon among those mentioned. The discussion paper highlights the benefits of competition within these sectors, as well as potential risks that may arise when Big Tech firms rapidly gain market power.
These multinational conglomerates play a pivotal role in consumers’ financial lives having firmly entered the payments, deposits, consumer credit and insurance sectors. The payments sector is often a first point of entry, with digital wallets such as Apple Pay and Google Pay being prime examples of this. Consumer credit is also of focus, as Big Techs begin to introduce Buy Now Pay Later products to accommodate their online stores. For example, Apple provide flexible financing options for their products via their partnership with Barclays. In terms of insurance industry, Big Techs are entering the market as intermediaries or by providing data or business services. Intermediaries allow consumers to search and compare insurance products, which Big Tech firms are then able to monetise for a commission fee.
The FCA outlined emerging themes, as well as possible scenarios pertaining to Big Tech entry and expansion in financial services. Although it was recognised that the payment sector is often seen as the ideal entry point, the FCA fully expects Big Tech firms to expand across multiple complementary financial sectors. The discussion paper also recognised that partnerships appear to be the preferred route of entry, at least in the short-to-medium term. In the long term, they may decide to compete with existing firms directly, through mergers and acquisitions or by slowly brining value chain activities in-house. However, entry strategies will very much depend on the jurisdiction of choice and their respective regulatory regime.
In their analysis, it was identified that Big Tech firms could potentially exploit their ecosystem and effectively lock consumers into being provided all of their financial services by one sole entity. The access and use of this consumer data was also a point of concern.
Competitive pressures increase innovation and technological efficiencies, which in turn should result in lower prices and better provision of financial services. As the EU set out their regulation of Big Tech firms through their Digital Markets Act, it will be interesting to learn how other jurisdictions and regulators choose to approach these entities in the context of financial services.
The full discussion paper can be found here: FCA launches discussion on competition impacts of Big Tech on financial services industry | FCA
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