UK FCA Issues Discussion Paper on Competition Impacts of Big Tech in Retail Financial Services

On October 25, 2022, the UK Financial Conduct Authority (FCA) published a discussion paper on the potential competition impacts of “Big Tech” entry and expansion in the following four retail financial sectors: payments, deposit taking, consumer credit, and insurance.

The paper focuses on the economic incentives driving Big Tech firms’ entry and expansion into retail financial services, associated market entry barriers, and wider competition impacts.

The discussion paper is open to consultation until January 15, 2023. The consultation represents the start of the FCA’s evidence-gathering exercise and is the first opportunity for industry participants to seek to influence any potential regulatory interventions.

What does the FCA mean by “Big Tech”?

The FCA defines “Big Tech” as “large technology companies with established technology platforms and extensive established customer networks.” The FCA notes that a number of such companies have already entered financial services in the UK and globally, and it predicts that they may expand their operations further, and quickly, due to their large user bases, ecosystems, market shares, and financial resources. The Big Tech firms referenced by the FCA are Amazon, Apple, Google (Alphabet), Meta (including Facebook, WhatsApp, and Instagram), and Microsoft. Where relevant, the FCA will draw lessons from other Big Tech firms that primarily operate in Asia and South America.

The aim of the discussion paper

The discussion paper does not propose any regulatory or policy changes at this stage. Instead, it aims to stimulate a discussion with interested parties (in particular, Big Tech firms, regulated financial services firms, smaller challenger firms, trade bodies, consumers, and other regulatory agencies) on the potential competition impacts of Big Tech’s entry and expansion into retail financial services in the UK.

The five key themes identified by the FCA

While the FCA recognizes that financial services offered by Big Tech firms often bring benefits to consumers (e.g., in the form of innovative services and competitive prices), it warns that, in the longer term, Big Tech firms could pose competition risks.

The FCA has preliminarily identified the following five market themes:

1. 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. While the payments sector has often been the first point of entry, the FCA notes that, over the longer term, Big Tech firms may seek to leverage their existing strengths to expand into complementary markets.
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. The FCA predicts that Big Tech firms may look to bring more activities in-house and expand their service provision along the value chain through mergers and acquisitions, organic growth, or a combination of both to compete more directly with existing providers.
3. Big Tech firms’ entry may not be sequential or predictable. While initial forms of entry may be hard to predict, once momentum builds, we might see significant market changes occur quickly. The FCA states that Big Tech firms’ ecosystem business models and conglomerate operations mean that entry into one financial services market will create opportunities for expansion into complementary financial markets.
4. In the short term (and possibly over the longer term), Big Tech firms’ entry in financial services could benefit many consumers. These benefits could arise from Big Tech firms’ own innovations as well as from an increase in other market participants’ incentives to innovate, improve quality, and reduce prices of financial products and services through increased competition.
5. In the longer term, there is a risk that the competition benefits from Big Tech’s 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. In this regard, the FCA raises a concern that the advantages enjoyed by Big Tech firms (e.g., economies of scale, limitations to switching devices and related services, advanced technology, and access to rich user data) may lead to their rapidly gaining market share, markets tipping in their favor, and potential exploitation of market power.

Related developments

The Queen’s Speech 2022 confirmed the UK government’s plans to publish a landmark legislative package: the Digital Markets, Competition, and Consumer Bill (Draft Bill), which will propose new competition rules for big digital platforms and introduce broader reforms to the UK’s competition and consumer laws. As part of its new pro-competitive regime, the UK is planning to introduce (i) bespoke codes of conduct for Big Tech and (ii) so-called “pro-competitive interventions” (which might include interoperability remedies and structural/ownership separations) to address the root causes of Big Tech’s perceived market power. The Draft Bill is expected to be published and consulted on in the near term.

Next steps

The FCA will host an expert panel discussion on November 28, 2022, and sector-specific workshops on December 6 and 7, 2022.

The discussion paper is open to feedback until January 15, 2023, and 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.

Firms should consider how the market themes identified by the FCA may affect their businesses.

Firms may wish to consider responding to the questions posed by the FCA in the discussion paper.