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Bigtech Could Accelerate Interbank Payment Disruption, Says FCA

October 26, 2022
The UK’s Financial Conduct Authority (FCA) has looked at how bigtech is disrupting payments, as it seeks views on the potential competition benefits and harms from the changing market dynamic.

The UK’s Financial Conduct Authority (FCA) has looked at how bigtech is disrupting payments, as it seeks views on the potential competition benefits and harms from the changing market dynamic.

The FCA has joined other EU and US regulators in scrutinising the role of bigtech in financial services.

In so doing, it has played up the possibility that bigtech firms could enhance competition for card schemes.

“Card schemes have historically faced limited competitive threat from new payment networks given high barriers to entry, but innovation in interbank payments could weaken these barriers in future,” says the FCA’s study. “Big tech entry could help accelerate this process.”

Bigtech has grown its role in financial services in recent years, whether through payments options such as Apple Pay, WhatsApp’s peer-to-peer payments rollout in Brazil and India and Amazon’s business financing arm, Amazon Lending.

Bigtech firms’ presence in the UK financial services market has also been steadily increasing, with the potential to expand further and change markets quickly.

"In recent years, big tech’s entry into financial services, in the UK and elsewhere, has demonstrated their potential to disrupt established markets, drive innovation and reduce costs for consumers,” said Sheldon Mills, competition and consumers chief at the watchdog.

“Across the world, we’ve seen the capability of big tech to offer transformative new products in areas such as payments, deposits and consumer credit.”

The FCA wants to see the benefits that the presence of these firms have in financial services are fully realised while, at the same time, ensuring good consumer and market outcomes, Mills said.

“This is vital when we consider the role of big tech firms in the provision of key technological infrastructure like cloud services.

"The discussion we are starting today will inform the FCA’s pro-competitive approach to digital markets, and I encourage consumers, firms and fellow regulators to join the conversation."

To begin the discussion, the FCA has published an analysis focusing on the potential competition impacts of bigtech’s entry in four vital retail sectors: payments; deposit-taking; consumer credit; and insurance.

With regard to payments, the FCA has foreseen three strategies that firms could take.

These include the possibility that bigtech firms could intermediate beyond their existing offering, digital wallets, and capture more of the payments value chain.

“Innovation has meant more firms are offering specialised payment services, making the value chain more complex,” says the study, using payment facilitators, acquirer processors and issuer processors as examples.

“Big tech firms could enter through one of these established functions, by offering services to existing firms, or through innovations such as ‘Tap to Pay’.”

Bigtech firms could also facilitate the adoption of non-card payment systems to compete with the card schemes directly. For example, a bigtech firm, especially if it already has wide adoption of its digital wallet, could facilitate the adoption of payments through a non-card payment channel, such as faster payments.

It could do this by integrating alternative payment options directly into digital wallets. In future, crypto-assets may also be used as a widespread means of payment, the FCA says, chiming in with the government’s plans to integrate stablecoins into payments legislation.

The FCA has also speculated that bigtech could widen the scope beyond retail payment products through digital wallets.

This could include offering services such as peer‑to‑peer transfers (with technology such as tap‑to‑transfer). This would serve more use cases and increase the volume of transactions processed through bigtech firms’ technology

“In the short term and maybe enduring longer, big tech firms’ entry could drive low-cost take-up, secure a strategically important role in payment networks, and increase incumbent firms’ incentives to innovate and offer better value payment services,” the study suggests.

Competition risk

The FCA also warned that in the long term, a competition risk may emerge as the market evolves, whereby bigtech firms control access and data to a significant portion of transactions through a monopoly on key mobile gateways.

This could create the potential of a market power issue over in‑person mobile transactions, as well as for remote browser and/or app transactions. As gatekeepers to mobile-based transactions, they could have the ability and incentive to exploit their market power.

No regulatory changes are being proposed at this stage and the FCA’s paper aims to stimulate discussion to inform its regulatory approach to bigtech firms as part of the new UK regime for digital markets.

The FCA’s intervention comes days after Meta was forced to sell GIF library Giphy by the Competition and Markets Authority (CMA), after it concluded that the 2020 acquisition suppressed competition.

Yet the FCA appears to be taking a more balanced approach than some neighbouring regulators, which have made their distrust of bigtech known through various actions.

The Dutch Authority for Consumers and Markets, for example, concluded in 2020 that although bigtech has the potential to promote competition and innovation in payments, a tightening of the rules was needed to open up their platforms to ensure a level playing field.

Meanwhile, in May this year, the European Commission informed Apple of its preliminary view that it abused its dominant position in markets for mobile wallets.

By limiting access to a standard technology used for contactless payments with mobile devices in stores, Apple restricts competition in the mobile wallets market on iOS products, the commission said.

Agustín Carstens, general manager at the Bank for International Settlements (BIS), meanwhile said in a speech last year that he felt it was undesirable to rely solely on private money, alluding to the now failed attempt by Meta to create a global stablecoin.

“Users may initially find great convenience in paying with a big tech global stablecoin. But in doing so they may be handing the keys to our monetary system over to private entities, driven by profits and accountable only to their shareholders and other insiders.”

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