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EU regulators are increasingly hinting that they will use the Digital Markets Act (DMA) as a method of reining in bigtech’s role in the payments space.
The EU’s Digital Markets Act, first proposed at the end of 2020, is looking increasingly likely to have an impact on the payments sector.
This is in spite of payments insiders having frequently told VIXIO that they are not in scope and do not see it as a priority when the proposal was first made public by the EU’s competition chief, Margrethe Vestager.
The DMA aims to rein in large online platforms, and is part of the EU’s ongoing pushback against Silicon Valley, as evidenced by enforcement action against the likes of Google, Facebook and, most significantly for the payments sector, Apple Pay, in recent years.
In 2020, the European Commission opened an investigation into Apple practices regarding Apple Pay.
The proposed regulation has gained notoriety for its coining of the new EU legal term: a gatekeeper. Gatekeepers are classified as being a provider of a core platform service, with a significant impact on the market, serving as an important gateway, and enjoying an entrenched and durable position.
As it stands, the proposal does specifically mention payments among services provided by potential gatekeeper platforms, but not payments institutions themselves.
However, as it progresses through the EU’s legislative institutions, members of the European Parliament have pushed for payment services to come under enhanced scrutiny through the act.
National regulators such as the Dutch Authority for Consumers and Markets have also suggested that the DMA could aid antitrust enforcement into issues like Apple’s near field communication not being opened up to competitors in the payments space.
Bigtech threat to payment incumbents
“Bigtechs do not want to become fully fledged banks, at least not for now, and they are focused on payments,” said Olivier Guersent, director-general at the European Commission Directorate General for Competition.
In payments, bigtechs leverage positions of market power from their existing businesses in e-commerce and social media and offer new services, often free of charge, he pointed out.
“They can grow rapidly, exploiting network effects and taking advantage of their proprietary data, financial resources, technical and geographical capabilities, and, of course, established reputation.”
At the same time, however, bigtech platforms have been able to exploit an asymmetry of regulation, dodging the rules that incumbent banks need to observe, he cautioned, summarising that this is why bigtech’s role in the EU’s financial services sector needs close attention.
Often, while banks and fintechs have to abide by the rules of the revised Payment Services Directive (PSD2), bigtechs often enter the market as technical service providers and avoid needing a PSD2 related licence, he said.
“Applying similar regulation to other sectors seems necessary if we want to maintain a level playing field,” he suggested.
It is yet to be determined whether it will be revisions to the PSD2, due to begin in the coming months, or the DMA that will deliver these changes. Guersent has yet to confirm either way where the regulation of bigtech will fall.
He did, however, note that competition policy and the DMA need to work hand in hand to be successful, suggesting that all of the areas that the commission wants to address may not end up being in the DMA.
Discussing how PSD2 has changed the financial landscape, ING’s Teunis Brosens said that the financial services sector has experienced an “unbundling” in recent years.
“Banks have been taken out of the equation in some parts of the value chain,” the regulatory and digital economist said. “As a result, you could say the roles and responsibilities of the different players in finance are becoming less clear,” he said.
These responsibilities are becoming less clear from a user perspective, he said. “Who am I dealing with, who is my counterparty, who can I hold liable in case of trouble, and who is viewing my data and using it?”
As well as this, supervisory responsibilities have been unbundled, he suggested. “Who in the chain is doing anti-money laundering checks, where is data being processed?”
The main risk for banks and financial services now is that less tightly regulated firms will be taking the best part of the value chain, he said.
“Banks run the risk of being relegated to the back office,” he added, pointing out that banks could have to offer their balance sheet with very low-interest margins and their fees being squeezed by client-facing platforms.
That is not to say that platform companies have not played the situation really well, he said. “Should you feel sorry for banks? Well, not really,” he quipped.
Platform companies have great skills and network effects, he said. “Good for them,” he said, noting that banks have only just woken up to the potential of the data that they are sitting on.
“Banks missed a boat there.”
Some have already predicted that bigtechs will eventually take over from traditional institutions, at least in the retail context, with the Dutch competition authorities warning last year that this could lead to them monopolising the customer-facing elements of the market.
