The FCA announced an inquiry into Big Tech firms’ entry into the retail financial services sector on October 25th with a response date of January 15th. Four key areas are addressed: payments, deposit taking, consumer credit, and insurance.
The full discussion paper is linked here.
We support the FCA’s analytical approach to assessing entry, costs and benefits, and likewise, the approach to determining overall competitive impact (by balancing pro-competitive benefit with anti-competitive harm). Some additional competition in retail banking might increase innovation and could be thought welcome.
However, we see the FCA remit as broader and when considering the tech platforms needs to also consider other factors, such as its obligations to oversee prudential issues and maintain capital adequacy.
When looking at the entry barriers involved, it is worth bearing in mind the inevitable economics of Big Tech which were outlined in Nobel Prize Winner, Jean Tirole’s recent Book, “Economics for the Common Good”. These companies can get bigger and benefit from vertical integration and efficiency advantages that cannot be replicated. Hence, the usual methods and tools of analysis used for competition assessments need to be altered.
In brief, platforms already have their technology in the hands of all UK consumers. Unlike Fin Tech or new entrant retail banks, they can offer a new service at incremental cost. Their technology is already used for many, if not all, online purchases. One current example is the handsets substituting card and wallet use for retail banking. As the FCA notes, Apple has entered into a deal with MasterCard, currently limited to the USA, but which could be rolled out to the UK at the flick of a switch.
They have bigger, more valuable and better recognised brands than incumbents and entrants. Their advantages over current retail banks are significant in terms of scale, scope, existing investment in necessary technology, networks and relevant functionality. They have greater reach than the private networks run by others for banks and insurance companies. Their data advantages allow them to offer subsidised services, or services to end users free at the point of use. They have higher volumes of users and multidata touch points, providing them with considerable data advantages in training their algorithms. Their investments and assets far outstrip the scale of current banking assets and include networks and intellectual property for their operation. They also benefit from greater network externalities than the banks.
In terms of their economic position, they should be regarded as existing and committed entrants. This is because their capital costs have already been committed to infrastructure that already supplies activities that substitute, or are capable of substituting, current retail banking services.
Barriers to entry into their core businesses are enormous.
The existing UK banking industry is thus facing “One Way Competition”. The competitive pressure from the tech platforms on the banks cannot be responded to by the banks as they have none of the necessary capital, capabilities, technology or assets commanded by the Big Tech platforms.
This issue challenges regulatory assumptions and systems based on assumptions of entry being restricted to current players with limited resources. It may be the case that current licensing systems need to be amended to recognise these issues.
When considering the strategic importance of the City to the UK we also consider that a further step is needed in the FCA methodology for assessment. Financial services, including banking and insurance and associated business services provide the country with a key source of truly comparative advantage. This has arisen for a variety of reasons, only some of which are economic. We consider that to examine the threat to financial services solely through an economic or competition lens would be to misunderstand the full picture.
We have prepared a detailed response to the FCA’s discussion paper and list of consultation questions. We will be posting MOW’s views in detail, issue-by-issue over the coming weeks.
Header image courtesy of flickr (licensed for free under the free flickr license).