Big Tech and Retail Financial Services: FCA Begins Discussion on Benefits and Risks of Competition | Hogan Lovells


The FCA has released a discussion paper on the potential competitive impacts of Big Tech entry and expansion into retail financial services. Particular emphasis is placed on payments, deposits, consumer credit and insurance. While no regulatory changes are proposed at this stage, the paper aims to stimulate discussion to inform the FCA’s regulatory approach to Big Tech companies under the UK’s new pro-competitive regime for markets. digital.

What does FCA mean by “big tech companies”?

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

Why now?

The FCA explains that the presence of Big Tech companies internationally and in UK financial services markets has increased, with the potential to grow and change market outcomes rapidly. While their entry and expansion could bring benefits to consumers of retail financial services by effectively and fairly competing with incumbents and other new entrants, including fintechs, the potential exploitation of market power would be detrimental to the competition and longer-term consumer outcomes.

Given the potential implications for consumers and competition, the FCA committed in its latest business plan to proactively identify the risks and competitive benefits of Big Tech entering financial services.

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

Areas of intervention: payments, deposits, consumer credit and insurance

According to the FCA, the purpose of the paper is to initiate a discussion of potential competitive impacts identified using existing research to inform its approach to Big Tech companies.

The paper contains an analysis focused on the potential competitive impacts of Big Tech’s entry into four key retail sectors: payments (Chapter 3), deposits (Chapter 4), consumer credit ( chapter 5) and insurance (chapter 6). The FCA chose these sectors because of their importance to the financial lives of consumers and the potential impact on competition that the entry and expansion of Big Tech companies could have on them. He points out that no Big Tech company is yet licensed to provide products and services in the form of deposits, mortgages or pensions in the UK.

After reviewing the four relevant retail sectors, the FCA identified five key emerging themes:

  1. Potential for Big Tech companies to enhance the overall value of their ecosystems with further entry and expansion into retail financial services sectors through innovative propositions: While the payments industry has often been the first point of entry, longer-term Big Tech entry is unlikely to be independent between financial services markets, as entry into one market will create opportunities to expand into complementary markets, with core and other businesses playing a role.
  2. In the short term, a partnership-based model will likely continue to be the dominant entry strategy for Big Tech companies. In the longer term, they may seek to rely less on partnerships and compete more directly with existing businesses: Large tech companies may seek to integrate more business internally and expand their service offering across the value chain through mergers and acquisitions, organic growth, or a combination to compete more existing suppliers directly.
  3. The entry of Big Tech companies may not be sequential or predictable. Although the initial forms of entry can be difficult to predict, once momentum is gained, significant changes in the market could occur quickly: Ecosystem business models and the conglomerate operations of large tech companies mean that entering a financial services market will create opportunities to expand into complementary financial markets.
  4. In the short and perhaps longer term, the entry of Big Tech companies into financial services could benefit many consumers: These benefits could arise from Big Tech companies’ own innovations as well as from increased incentives for other market players to innovate, improve the quality, and reduce the prices of financial products and services through increased competition.
  5. In the longer term, there is a risk that the competitive advantages of Big Tech entry into financial services will be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes. : This risk may arise given the characteristics of digital markets (including economies of scale and scope, limitations on switching and multihoming, incumbent data benefits and network effects) and the characteristics and behaviors of Big Tech companies (including global scale and large user bases, rich data about their users with advanced analytics and technology, influence on decision making and defects, product ecosystems and their strategic choices and investments). These characteristics can cause them to quickly gain market share, “tilt” the markets in their favor and potentially exploit their market power.

The larger context

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

Next steps

FCA invites responses to the discussion paper by January 15, 2023 and will host an expert panel on November 28, followed by sector workshops on December 6 and 7. You can register to attend the webinar here.

The FCA plans to issue a comment statement in the first half of 2023, setting out its response and how it will develop its regulatory approach in response to the comments received.

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