About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance's mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.
The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation, and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses are able to access finance.
This response sets out the views of Innovate Finance, based on consultation with members across the UK FinTech ecosystem. Our policy view is focused on creating an environment that best supports FinTech StartUps, ScaleUps and high growth firms and it is these groups of members who have predominantly shaped our response and we have reflected views and feedback received from these FinTech firms.
Introduction
Innovate Finance welcomes the opportunity to respond to DP22/5. Big Tech is an important part of a dynamic FinTech ecosystem. The relationship between FinTechs and Big Techs is multivarious: customer and supplier, competitor and collaborator.
A vibrant FinTech ecosystem, and an efficient and inclusive economy and financial services market, benefits from a mixed market that includes established Financial Institutions, FinTechs and ‘Big Tech’. Effective competition, access for market entrants, and balanced market power must be integral parts of this.
We cannot predict the future but we can envision different possible scenarios, the drivers behind them, which we may wish to aim towards. Looking at the future of digital finance and a digital economy, we can paint four very different – and very extreme – pictures of future worlds. Note these are for illustrative purposes, intended to provoke debate, and are not predictions:
As we have argued elsewhere, the UK needs to become a clear beacon of a ‘digital democracy’, building on its long-established traditions and reputation, while radically innovating in other areas. A world leading digital democracy should combine the market with proportionate regulation and protect consumers, promote competition, and provide legal certainty and impartiality. This requires a private market that is diverse and open, publicly regulated to ensure competition, support innovation and protect consumers; and based on open data and code and balanced market power. For innovation to thrive, regulators need to support market competition and avoid creating barriers to entry for smaller innovators, supporting the ability for new entrants to access the market in a fair and competitive way.
A key theme throughout our response is consumers’ ownership of their data. Developing an ‘Open Data’ framework for data portability across the economy would give consumers the right to access their data held by businesses and require those businesses to share the consumers’ data with other trusted third parties. This should, if introduced appropriately, lower barriers to entry into financial services, helping to develop a level playing field that promotes innovation and competition.
The FCA Discussion Paper DP22/5 is an important part of the debate about future financial markets and how we build a resilient digital democracy.
Key points
Building on, and responding to, the FCA discussion paper, we would emphasise the following points which we also elaborate below in response to the specific questions raised in DP22/5.
A broader approach is needed: more sectors should be in consideration
Whilst identifying four important retail sectors (payments, deposit taking, consumer credit and insurance), DP22/5 takes too narrow a view and needs to think more broadly than these four sectors.
Other areas of financial services which are relevant to consideration of Big Tech competition impact in the future include:
- Crowdfunding and Platform finance;
- Asset management;
- Cryptocurrencies, Central Bank Digital Currency (CBDC) wallets and digital assets; and
- Embedded finance and integration with non-financial services.
A wider set of scenarios for Big Tech growth and expansion need to be considered
Of the sectors DP22/5 explores, the scenarios considered are limited. For example, the development of stablecoins is not considered under the ‘Payments’ section. We also question whether trying to second guess companies’ growth strategies is the most fruitful basis for developing policy. If it is, more extreme and complex scenarios should be considered. Looking at the underlying sources of market power may be more helpful.
A more useful approach to developing policy may be to consider the common foundations of market power
We would recommend developing an analytical and policy approach that identifies and addresses the common drivers of competition and market power risks across retail markets. These can include:
- Power of proprietary data: harnessing wider customer data sets, unavailable to other providers;
- Role as gatekeeper: e.g. controlling the distribution route;
- Control of / access to widely adopted software or hardware: where convenience of using, for example, a particular make of watch or phone that links to a payment method, creates a barrier to other providers;
- Acquisition of competitors: ability to acquire any promising competitors can stifle innovation and a competitive market whilst also, if balanced, encourage investment in FinTech.
The Competition and Markets Authority (CMA) Digital Markets Unit is already looking at these areas and FCA (as well as the Prudential Regulation Authority and Payment Systems Regulator) considerations on competition need to be coordinated with the CMA to ensure a joined-up approach.
These broader market issues are not unique to Big Tech. They are more widely applicable to maintaining competition and innovation in a digital economy and in financial services specifically and may be applicable to other types of firms with significant market power. It should also be noted that ‘Big Tech’ firms themselves are multi-various and each have very different business models, markets and approaches.
A joined-up approach is needed across existing and future regulatory regimes
This should enable consideration of existing remedies and regulatory regimes that can be applied, those that could be amended, and development of future regulation and innovation in the market including:
- CMA powers on merger and acquisitions;
- CMA Digital Markets Unit activities;
- Reviewing the regulatory perimeter for systemic prudential regulation and service providers;
- Developing outcome based consumer and conduct regulation.
Open data and Digital ID should be a critical part of the solution
Introducing ‘portable data’ based on citizen ownership of their data, accompanied by regulatory requirements for ‘Open Data’ across the economy (requiring all data holders to act on requests from citizens for their data to be provided to any authorised third party) and supported by a ‘Digital ID’ or a citizen’s data wallet.
Digital ID is an important component, enabling citizens to hold a digital passport that acts as the dashboard and control panel for their data.
Implementation of Digital ID and of Open Finance needs to be done in a way that increases competition. Safeguards will be needed to ensure Digital ID does not become dominated by a smaller number of large entities. And further consideration is needed of how Open Banking and Open Finance may operate in the future, in relation to firms with significant proprietary data entering financial services.
Future regulatory developments should assess competition impact and build in remedies
Just as the market is not static, nor is the regulatory landscape. There are regulatory developments underway, often to promote innovation, such as stablecoin, Central Bank Digital Currency (CBDC) and development of the payments system. Regulators should consider the implications of Big Tech and wider competition in the market (including incumbent advantage) in developing these regimes and build in safeguards to promote competition. For example, any stablecoin regime should be open to any provider who meets the criteria and a UK CBDC should be implemented in ways that create a diverse market of wallet providers, and without creating significant barriers to entry.
The impact on StartUps and ScaleUps need to be further explored
DP22/5 particularly looks at the impact of Big Tech expansion upon larger financial services providers and particularly incumbent financial institutions. Equal consideration needs to be paid to the impact on StartUps and ScaleUps.
Benefits of Big Tech
Big Tech firms play an important role in the UK FinTech ecosystem and can bring further benefits. These include:
- Ability to use scale and greater data availability to tackle financial inclusion;
- Significant investment in the FinTech community, providing growth funding as well as incentivising many entrepreneurs to start and grow businesses;
- Ability to offer significant competition to large incumbent financial institutions in areas like banking and payment cards and the credit information market.
Regulatory approaches to competition should seek to maintain or ensure the realisation of these benefits.
Discussion Paper questions and responses
Question 1: In your opinion, will Big Tech firms in UK financial services follow a similar path to other countries? What factors would make the UK experience similar? Or what reasons may exist for Big Tech firms to look for new approaches in the UK?
We anticipate that Big Tech firms will want to take as similar an approach as possible in all jurisdictions, but UK regulations and consumer protections may lead to Big Tech taking a different approach. For example, the introduction of the Consumer Duty in the UK could shape a different approach to other jurisdictions. Equally, this will depend upon how UK authorities respond to action by regulators elsewhere, such as the European Commission preliminary investigation regarding Apple’s dominant position in markets for mobile wallets on iOS devices and access by third party developers to technology used for contactless payments.
Question 2: Have we identified the right analytical approach to assessing Big Tech entry and competition?
We would question whether trying to second guess companies’ growth strategies is the most fruitful basis for developing policy. If it is, more extreme and complex scenarios should be considered. Looking at the underlying sources of market power may be more helpful. We would encourage an approach that monitors and assesses potential drivers of market advantage, which are referred to in Figure 8 “Characteristics of Big Tech firms and retail digital financial services” - whilst noting that these do not necessarily apply uniformly, that they may apply to other firms too.
Retaliatory behaviour by incumbents?
DP22/5 suggests that “Aggressive entry and expansion could risk retaliatory behaviour from incumbents who may be customers of Big Tech firms’ other products and services, such as cloud computing, analytics or advertising”. Our FinTech members would question this - it is not clear that there is a retaliatory impact the incumbents can achieve in response to Big Tech entry. For example with cloud service providers, the market is dominated by a small number of providers and retaliation by moving business elsewhere is unlikely to be feasible. The FCA should consider this more carefully. Retaliatory behaviour is also not an avenue available to most FinTech StartUps, ScaleUps and high growth firms.
Embedded finance
Beyond just data, technology is developing to allow for the closer integration between financial services providers and non-financial companies, such as social media and e-commerce and the Internet of Things (IoT). The closer integration creates more opportunities for companies to aggregate and monetize consumer financial data. We note that DP22/5 does not mention embedded finance and integration with non-financial services.
Question 3: Have we identified the key drivers for Big Tech firms to enter?
Payments
Firms may leverage installed consumer bases to quickly scale in new payment businesses. For example, the rapid adoption rate of Apple Pay can in large part be credited to Apple’s dominance in the smartphone market in the US as shown in the graph across.
Where Big Tech delivers the convenience of using, for example, a particular ‘smart’ accessory or phone that links to a payment method, this can set up competition barriers for other providers, particularly smaller players.
As more financial services are conducted using mobile devices, significant control over mobile ecosystems may have implications in financial services including payments. Further details are set out in Q7.
As noted above, embedded finance which integrates finance (such as payments and credit) with credit and services and other applications is a growing trend that needs to be explored further. Our FinTech members would encourage the FCA to consider how Big Tech firms might grow into payments, by considering the likely positions Big Tech could take in the payments value chain (as mere processors, or as schemes in themselves) and how this expansion might take place in the short-,medium-, and long-term.
In the short-term, our FinTech members have suggested that drivers for Big Techs entering the payments sector could be revenue and data collection. In the long-run, our members foresee Big Tech’s expansion into payments could be a strategic decision to achieve embedded finance once they have access to banking information and transactional data. Therefore, they encourage the FCA to assess what the drivers are for Big Tech to take certain positions in the value chain.
Consumer credit
This analysis could usefully be broadened. All the scenarios considered in the Discussion Paper are based on things that are already happening. It would be beneficial to develop the analysis to consider some alternative scenarios that may be atypical but recognise that there could be significant change in the consumer credit market.
On credit specifically, some FinTech members have suggested that the FCA's thinking would benefit from splitting out Big Techs whose primary business is to sell things and those Big Techs whose primary business is to sell services and utilise consumer data . These factors may define what motivates a Big Tech to make credit available to consumers, for example one might be motivated by selling more goods through their platform whereas another may do it to keep more consumers within their ecosystem. These members believe these distinctions could help the FCA anticipate the different approaches in the consumer credit market.
The broader issue raised by our FinTech membership is that platform-based companies will aim to strengthen their ecosystems, which in turn will make them one-stop-shops for different categories of users (for example a consumer’s smartphone provider is also the intermediary they interact with for payments and credit). Regardless of their business model, the underlying issue is how platforms can leverage the data they have, for example to build better credit scoring that enables them to outcompete other providers.
Our members also note that DP22/5 focuses on consumer credit. However, SME lending (business lending, including micro businesses as well as small and medium sized businesses) should also be considered as well as other forms of consumer lending.
Question 4: What competitive advantages and disadvantages do Big Tech firms have over existing providers and potential entrants, such as FinTech?
Advantages across all sectors for Big Tech are the data they have, and the customer loyalty to their products and brands. They may leverage a targeted advertising model using the data they have, and may also control and act as gatekeepers of the process, e.g. payment services and app stores. It has been suggested to us that Apple, for example, mandates what the card issuer has to pay, incentivises customers to use cards via Apple Pay, and restricts charging consumers to use Apple Pay. This model can make it hard for others to compete and can strengthen a position as gatekeeper for in-person or online transactions. In situations where Big Tech firms may have significant presence in non-financial products (both hardware and software), and where closed ecosystems can often only support their native products and software, our members foresee scenarios where consumers will find it hard to switch away from a Big Tech’s financial offering to an alternative FinTech product.
Our members have shared concerns that some of Big Tech’s dominance in non-financial products could threaten equality of experience and opportunity. For example, the increase in watches, fitness trackers and accessories which have financial services capability mean that the convenience of these Big Tech enabled financial services will lead people to default to the “easiest” path for frictionless user experiences (e.g. the consumer never gets their card out to ride public transport, they wave their watch at the gate). For payments in particular, our members are of the view that it is important that the regulation of Big Tech in financial services should be on the basis of equality of User Experience for consumers in whatever payment journey they wish to choose. While Big Tech innovations that deliver seamless user experience can be seen as a consumer benefit, a Big Tech should not be able to make it harder to use other competitor’s products as opposed to theirs. If the ‘non-Big Tech’ solutions required additional steps (e.g. taking a phone out or providing ID verification), then the reality is that there (very likely) won’t be effective competition. Remedies might include a package of measures covering interoperability (enabling other FinTechs to utilise software and device operating systems, app stores and platforms) and self-preferencing (to enable fair and open choice between competing products, avoiding default setting and pre-installed self -preference).
Our FinTech members have also indicated that due to their scale of operations, Big Tech negotiating power in commercial deals can disadvantage FinTech’s capacity to innovate. The global nature of Big Tech firms means that even the largest FinTechs can face challenges in negotiating commercial deals that still provide them with the space to innovate. Very often such discussions take place not on a market-by-market basis but on a global basis which makes the implications of such deals almost existential when it comes to access to hardware or software developed by Big Tech firms. It has been suggested to us by FinTechs that this can force FinTechs to make tough decisions where access to this hardware or software has to be prioritised over developing new innovations that might benefit consumers (where these innovations are not viewed favourably by Big Tech firms).
This issue extends to new entrant start-ups that have always struggled with bargaining power when it comes to negotiating with banks, meaning they struggle to secure commercial deals to start offering financial services to their customers. It has been suggested to us that this can also put FinTechs at a competitive disadvantage in relation to large established financial services such as banks. Big Tech can offer to integrate established financial services with their (hardware and software) products and consumers increasingly see this integration as an essential functionality, such as in payments. Banks, knowing this, are willing to give Big Techs lucrative interchange fee sharing arrangements and FinTechs struggle to compete as a result.
On lending, some have speculated that Big Tech companies may succeed in monopolising the origination and distribution of loans to consumers and SMEs, forcing pure financial services providers, including FinTechs, to become “low cost manufacturers,” which merely fund the loans intermediated by the Big Techs. The following excerpt provides an example of how Big Tech has grown to surpass established financial services incumbents in China:
“The impact of Big Tech on retail banking has already been felt in Asia. For example, China’s most prominent online commerce company, Alibaba, launched in 1999, started Taobao in 2003 as a consumer e-commerce platform and added Alipay to Taobao in 2004 as a third-party online payment platform. Since then, Alipay (renamed Ant Financial in 2014) has played a vital role in Alibaba’s success and has successfully built its standalone presence with a wide range of financial offerings, including: payments, wealth management, lending, insurance, and credit scoring. Ant Financial’s market capitalisation is now larger than that of Santander, more than half that of Citi or HSBC, and it is growing fast. The safety and soundness of Ant Financial will therefore significantly influence global financial stability.” Miguel de la Mano and Jorge Padilla, Compass Lexicon.
Question 5: For each of the four sectors we have studied, have we identified the most likely entry scenarios?
Payments:
Our members would like the FCA to delve deeper into the partnerships model that is presently prevalent and whether that could make way for more direct intermediation in the payments value chain in the future. In other words, Scenario 1 (Big Tech firms could provide more services across the card schemes) is the present but Scenario 2, where Big Tech closed loop payment systems (that compete directly with card schemes) can become widespread is worth discussing. With the work on WhatsApp Pay for example, Scenario 3 also merits consideration, where peer-to-peer (P2P) could rapidly move towards peer-to-business (P2B). The three scenarios are not mutually exclusive, alongside cryptocurrencies, which could be a Scenario 4. Although currently omitted from the Discussion Paper, the potential uses of cryptoassets and stablecoin in payments (intermediation, non-card payments, wallets) is an important topic to our members and should be considered in the future by the FCA.
The Discussion Paper should also consider acquisitions of firms with interesting technologies and intellectual property as an entry route for Big Tech into payments and the sectors below.
Deposits and lending:
Deposit aggregators and lending marketplaces are worth considering in more detail. A Big Tech might offer a product as a distributor where they then “auction” deposits and loans (through an online market) as a bulk deposit or loan to whomever offers the best rate and kick-back such as through an auction process. That would cement them at the centre of deposit taking and lending and give rise to serious duopoly risks. This is in particular through the data they have which can predict which consumer might be looking for a new bank or lender.
Question 6: For each of the four sectors we have studied, how are current market participants likely to respond to entry by Big Tech firms? How might potential entrants’ plans be affected?
Question 7: For each of the four sectors we have studied, have we identified the key potential competition benefits and harms? Who stands to benefit most? Who is most at risk of harm?
Regarding the payments sector, our members are concerned with the potential emergence of multiple closed loop ecosystems as companies try to capture the entire value chain, leading to market fragmentation. As a reaction to this, other firms could either decide to partner with these payment systems or create their own. In a scenario where all of these are transformed into closed loops, this could lead to an inefficient level of fragmentation and a lack of interoperability that would be an inconvenience for consumers and likely increase the cost of acceptance to merchants. This calls for a larger regulatory focus by the FCA and others on the development and adoption of account-to-account (A2A) rails for P2B transactions. A2A rails such as Faster Payments, which is not-for-profit and tightly regulated, could prevent this fragmentation. Our members have suggested that incentivising or requiring payments firms to utilise common A2A rails could therefore be a potential solution to this risk of fragmentation.
Additionally, we see potential harms in particular for smaller FinTechs who may find it harder to break into the market without the existing customer base the Big Tech firms already have, and this could stifle competition and innovation that way. See also thoughts on Q4.
Question 8: If Big Tech firms enter and expand in financial services, will they create new complementarities between markets or their activities that we have not identified?
The FCA should consider investments data gathered as a Big Tech could support suitability assessments for investments and potentially lead to investment broking activities.
Our members also foresee potential also for expansion into crypto- and digital asset activities.
The Bank for International Settlement (BIS) has identified 6 rather than 4 sectors to consider: banking, credit provision, payments, crowdfunding, asset management and insurance. Whilst some of these may not be taking place in the UK yet, they may develop in the future.
Whilst identifying four important retail sectors (payments, deposit taking, consumer credit and insurance), DP22/5 takes too narrow a view and needs to think more broadly than these four sectors.
Other areas of financial services which are relevant to consideration of Big Tech competition impact in the future include:
- Crowdfunding and Platform finance
- Asset management
- Cryptocurrencies, stablecoin, CBDC wallets and digital assets;
- Financial services and Web3.0 including the metaverse and decentralised finance; and
- Embedded finance and integration with non-financial services.
Some members have flagged Twitter’s intention in late 2022 to enter the payments processing business in the United States and that ByteDance is reportedly building a platform to provide cross-border payment solutions for all ByteDance's products and services, such as TikTok. This suggests the scope of Big Techs is subject to change and the FCA should therefore be aware of other large social media companies or ‘super-apps’ entering the financial services sector and their impact on competition.
Question 9: Will the ways in which Big Tech firms enter and compete in the UK financial services markets be significantly influenced by regulatory boundaries? Does this differ across the four sectors we have studied?
Our members broadly agree that Big Tech’s entry into the UK financial services market will be significantly influenced by regulatory boundaries, especially for lending given the specificities of the UK regime, and the ability for white labelling. Entry, especially through acquisition, will be influenced by whether white labelling requires a licence, and whether the change in control is approved.
Our members are supportive of outcome-based regulation which balances an ability to innovate with consumer protection. This will allow regulators to be more agile to new developments without compromising on consumer protection or being quickly outmoded by innovation.
In all the sectors, a prevailing risk is that consumers’ data is not accessible to other providers and barriers to switching are made higher. The FCA should consider what tools the consumer needs to counteract this. As noted above, a portable digital identity (linked to smart data) is critical. Work on mitigating potential competition harms must be linked to work on the development of a digital identity. An important consideration our members have raised on ensuring data can be shared (granted by owner’s consent) is that Application Programming Interface (API) standardisation is necessary to enable the secure exchange of information between different parties, as with the account aggregation model. This may require regulators to authorise specialised entities for the centralised management of all of a consumer’s consents for data sharing.
Regulatory Remedies and mitigation
The FCA should work with other regulators (including the PRA and CMA) to further consider existing remedies and regulatory regimes that can be applied, those that could be amended, and development of future regulation and innovation in the market, in ways that promote competition more widely. This includes:
- CMA powers on merger and acquisitions: This needs to guard against acquisitions that have a detrimental effect on market diversity and competition. Equally, it is important to recognise the role Big Tech takes in investing in the FinTech ecosystem, providing growth capital and incentives for entrepreneurs to start, grow and exit businesses. The CMA should develop an approach that maintains the competitiveness of the UK investment environment and incentives for entrepreneurs whilst also exploring how best to mitigate predatory acquisitions which on aggregate may damage diversity in markets. Alongside this, the CMA approach has in the past been applied to FinTech sub-sectors in ways which have prevented a competitive UK based ScaleUps to develop; the CMA should avoid taking too narrow a view of the relevant market. Competition authorities’ rulings on M&A can strengthen or weaken potential competition to Big Tech providers - an unduly narrow approach to cases can lead to actions that prevent the creation of scaled up competitors.
- CMA Digital Markets Unit (DMU) is in the most appropriate position to intervene in cases of gatekeeper effects. The DMU could specifically examine, with FCA, any gatekeeper issues should they arise in financial services. The DMU will need significantly more expertise in financial services, or closer collaboration with FCA, to carry out this work.
- Reviewing the regulatory perimeter for systemic prudential regulation and service providers: Current reviews of critical third party providers and systemic payments providers provide a basis for looking at extensions of the regulatory perimeter to include those providers who may be ‘systemic’ due to their scale.
- The regulator’s approach should follow a principle of ‘same risk or activity, same regulatory outcome’ to create a level playing field, looking at systemic risks across financial markets.
Open data and Digital ID should be a critical part of the solution
Data is now the biggest source of power in our world. An essential element of ensuring a democratic balance of power in the use of data is for the UK to adopt a ‘citizen's right to data’: introducing ‘portable data’ based on citizen ownership of their data, accompanied by regulatory requirements for ‘open data’ across the economy (requiring all data holders to act on requests from citizens for their data to be provided to any authorised third party) and supported by a ‘digital ID’ or a citizen’s data wallet.
Whilst not in the gift of the FCA, the UK government should build on the current Data Protection and Digital Information Bill to introduce an economy wide ‘open data’ regime and set out a strategy and timeline for achieving this. This would follow the approach already taken in other countries. It should be the springboard for building the most vibrant digital economy in the world, enabling a truly data driven economy which is trusted by and creates value for its citizens. The government shouldn’t aim to create these services alone and control the value chain end-to-end, as this would be inefficient and would not leverage the UK's strong FinTech network. Rather the government should open the data gates and enable interoperability by establishing regulation and incentivising industry to come to common standards, and aggregators and other intermediaries will naturally emerge as a result.
Australia has introduced a Consumer Data Right which establishes the legal framework for sharing customer-driven data-sharing in banking and is due to be expanded beyond the financial services sector to include energy and telecommunications data. Singapore has also invested in the world’s first public digital infrastructure to use a national digital identity that enables secure data portability between government agencies and financial institutions. This infrastructure will underpin the transition to Open Data.
Digital ID is an important component of such an open data economy, enabling citizens to hold a digital passport that acts as the dashboard and control panel for their data. Implementation of digital ID needs to be done in a way that ensures a competitive and diverse market of providers - maintaining some independence in the function of digital ID provider to guard against this becoming a tool that is dominated by a few mega firms and creating an additional potential source of market dominance.
Potential effects of open finance
Linked to this, it is also important to consider the potential effects of more limited Open Finance: does Open Finance give Big Tech greater power by enabling them to combine others' finance data with their own data? And how does Open Finance need to be managed in this context? As noted above, the development of an economy wide ‘open data’ (secure and consented sharing of customer data with authorised third-party providers wherever a customer’s data is held on their behalf) could mitigate this specific risk within financial services by opening up wider data sets held by Big Tech that provide their proprietary data advantage.
Our members would encourage the FCA to consider the potential implementation of data reciprocity measures as Big Tech enters more significantly into financial services leveraging Open Finance. If Big Tech are able to grow their financial service users similar to the size of the big banks (i.e. CMA 9), the rationale for requiring them to also open up their data via APIs becomes stronger as an initial step towards open data driven by a digital ID.
Future regulatory developments should assess composition impact and build in remedies
Just as the market is not static, nor is the regulatory landscape. There are regulatory developments underway, often to promote innovation, such as stablecoin, CBDC and (as noted above) development of the payments system. Regulators should consider the implications of Big Tech and wider competition in the market in developing these regimes and use an evidence-based approach to build in safeguards to promote competition. For example, any stablecoin regime should be open to any provider who meets the criteria and a UK CBDC should be implemented in ways that create a diverse market of wallet providers, and avoid creating significant barriers to entry.
Other regulatory questions:
We have identified a number of other areas of regulation that merit further exploration:
- Unintended consequences: How do we ensure that actions on Big Tech don’t in turn consolidate market power by existing incumbents?
- What are the risks that regulatory action to promote competition in relation to Big Tech might act as barriers to entry or barriers to growth for smaller FinTechs?
iii. Regulator roles and regulatory perimeter. How can competition be best managed across FCA, PSR and CMA?
- Regulatory models? How can regulators be agile and respond quickly and proportionately to market developments? Do regulators need any additional powers or tools to track what is happening in the market? How can the market study approach be applied or updated?
- Do other regulatory areas, such as AML and financial crime, data privacy, and consumer duty have any competition effects or affect the level playing field?
1 Innovate Finance, Innovate Finance paper for Treasury Committee inquiry into Crypto-Assets, 2022.
2 For example, Open Banking is currently based on the portability of current account information. A new entrant to the deposits or consumer credit market may have significant proprietary data that is not ‘current account’ or even traditional finance data but can nonetheless significantly inform lending or banking services (e.g. behavioural data that enables better credit decisioning). This new entrant would be able to offer services to a consumer that utilises access to that consumers’ current account data held by traditional lenders but potentially would not be obliged to share its own proprietary data that can support better credit decisions.
3 European Commission, Antitrust: Commission sends Statement of Objections to Apple over practices regarding Apple Pay, 2022.
4 FCA, New cancellation and variation power: Changes to the Handbook and Enforcement Guide Policy Statement PS22/5, 2022.
5 Consumer Financial Protection Bureau, The Convergence of Payments and Commerce: Implications for Consumers, 2022.
6 The Wall Street Journal, Three quarters of iPhone users in the US have now enabled Apple Pay, 2022.
7 See European Competition Journal (forthcoming), Maintaining a Level Playing Field When Big Tech Disrupts the Financial Sector, 2021
8 Compass Lexecon, Expert Opinion: The Pros and Cons of Big Tech Banking, 2019
9 Miguel de la Mano and Jorge Padilla, The Pros and Cons of Big Tech Banking, 2019.
10 Bank for International Settlement, Big techs in finance: regulatory approaches and policy options, 2021.
11 Electronic Payments International, Twitter applies to enter payments processing business, 2022.
12 Forbes, TikTok’s Parent ByteDance Pushes Into Payments With Help From J.P. Morgan, 2023
13 BIS, API standards for data-sharing (account aggregator), 2022
14 See the SEEDRS and CrowdCube proposed merger which was scuttled by the CMA.
15 Bank of England, DP3/22 – Operational resilience: Critical third parties to the UK financial sector, 2022.
16 HM Treasury, Payments Regulation and the Systemic Perimeter: Consultation and Call for Evidence, 2022.
17 Some members note the likes of “Zero-Knowledge Proofs” are designed to allow users control of which bits of their data they choose to share from a digital ID framework. Although this is not the only technical solution, it is one potential method of dealing with some of the governance concerns around digital ID.
18 UK Parliament, Data Protection and Digital Information Bill, 2022.
19 Australian Competition & Consumer Commission, The Consumer Data Right, ud.
20 The FinTech Times, Singapore Launches World’s First Public-Private Partnership to Create A New Digital Infrastructure, 2020.
