Out-Law News 2 min. read
Technology companies’ impact on financial services competition studied by FCA
26 Oct 2022, 10:01 am
The entry into financial services markets by major technology companies could accelerate digital transformation at banks, insurers and other incumbent firms, to the benefit of those businesses and consumers too, the Financial Conduct Authority (FCA) has said.
The FCA said technology companies’ entry into financial services markets could bolster “operational and technological efficiencies”, support improved financial inclusion, and drive the adoption of cloud-based solutions. It has, however, also raised concerns about the potential impact on competition in the longer-term if those technology companies “gain market power”.
“Big Tech firms … can bring benefits to consumers of retail financial services by effectively and fairly competing with incumbent providers, and other new entrants including fintech firms. They can provide innovative, efficient products and services. However … competition risks could arise in the future from them rapidly gaining market share, markets ‘tipping’ in their favour, and potential exploitation of market power that would be harmful to competition and consumer outcomes,” the FCA said.
The FCA’s views were set out in a new discussion paper that explores the potential competition impacts of the entry and expansion into retail financial services markets by major technology companies. Publication of the paper comes shortly after Amazon announced its further expansion into UK financial services markets with its new online price comparison service for insurance.
The FCA’s discussion paper is focused on four retail sectors: payments, deposit taking, consumer credit and insurance.
The regulator said it had identified five emerging themes in those sectors in relation to the market entry of major technology companies into financial services, including that there is potential for those companies to launch in individual sectors, with innovative products and services, and to subsequently expand their offerings into “complementary markets”.
The regulator said it had identified five emerging themes in those sectors in relation to the market entry of major technology companies into financial services, including that there is potential for those companies to launch in individual sectors, with innovative products and services, and to subsequently expand their offerings into “complementary markets”.
The FCA said the “partnership-based model” that technology companies have already used as the main way to enter financial services markets is likely to remain the “dominant entry strategy” in the short-term. It expects to see more direct competition in future and said that “significant market changes” could “occur quickly” once technology companies have initially established themselves.
The regulator said benefits from market entry could arise from technology companies’ “own innovations” as well as their presence driving other businesses in the market to “innovate, improve quality and reduce prices of financial products and services through increased competition”. The FCA also said technology companies could use features of their business, such as their scale and access to data, to improve their market share and warned of the risks to competition if that leads to exploitation of “entrenched market power”.
The FCA’s discussion paper is open to feedback until 15 January 2023. The regulator said it has no current plans to change policy or regulation to reflect technology companies’ entry into financial services markets, but it does intend to publish a feedback statement in the first half of next year setting out its response to the views it receives and how it intends to develop its regulatory approach
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