Big Tech and retail financial services: FCA starts discussion on competition benefits and risks

What does the FCA mean by ‘Big Tech firms’?

The FCA adopts the Financial Stability Board’s (FSB) definition of Big Tech firms: large digital companies with established technology platforms and extensive established customer networks.

Why now?

The FCA explains 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. While their arrival and expansion can bring benefits to consumers of retail financial services by effectively and fairly competing with incumbents and other new entrants including fintechs, potential exploitation of market power would be harmful to competition and consumer outcomes in the longer term.

Given the potential implications for consumers and competition, the FCA committed in its latest Business Plan to proactively identify competition risks and benefits from Big Tech entry into financial services.

The FCA wants to develop an effective competition approach for Big Tech firms in UK financial services that is coherent with the wider regulatory landscape both in the UK and internationally. The discussion will help inform its approach to, and understanding of, Big Tech firms in the context of:

• the new UK pro‑competitive regime for digital markets and those of other jurisdictions such as the EU and the US;
• the UK’s Future Regulatory Framework;
• the new Consumer Duty; and
• (subject to the results of the Parliamentary legislative process) the proposed secondary international competitiveness and growth objective under the Financial Services and Markets Bill.

Areas of focus: payments, deposit taking, consumer credit and insurance

According to the FCA, the purpose of the paper is to kick off a discussion on the potential competition impacts identified using existing research to inform its approach to Big Tech firms.

The paper contains analysis focusing on the potential competition impacts of Big Tech’s entry into four key retail sectors: payments (Chapter 3), deposit taking (Chapter 4), consumer credit (Chapter 5) and insurance (Chapter 6). The FCA has chosen these sectors because of their importance to consumers’ financial lives and the potential competition impact Big Tech firms' entry and expansion could have on them. It points out that no Big Tech firm yet has permissions to provide products and services in deposits, mortgages, or pensions in the UK.

Having examined the four retail sectors in scope, the FCA has identified five key emerging 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, over the longer term Big Tech entry is unlikely to be independent between financial services markets as entry into one market will create opportunities for expansion into complementary markets, with Big Tech firms’ core and other activities playing a role.
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 look to rely less on partnerships and compete more directly with existing firms: 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 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, significant market changes could occur quickly: Big Tech firms’ ecosystem business models and conglomerate operations mean entry into one financial services market will create opportunities for expansion into complementary financial markets.
4. 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.
5. 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). These characteristics can lead them to rapidly gaining market share, markets ‘tipping’ in their favour, and potential exploitation of market power.

The wider context

The FCA’s discussion paper is part of wider joint work on online safety, consumer protection and financial stability in digital markets, including:

• with the PRA and the Bank of England, on operational resilience and the role of critical third parties; and
• with Ofcom through the Digital Regulation Cooperation Forum (DRCF), on online safety and financial fraud to protect consumers from scams.

Next steps

The FCA is inviting responses to the discussion paper by 15 January 2023 and will be hosting an expert panel event on 28 November, followed by sector specific workshops on 6 and 7 December. You can register to attend the webinar here.

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.

Authored by Virginia Montgomery