By Ania Thiemann, OECD Competition Division, Directorate for Financial and Enterprise Affairs. The topic will be discussed at the panel FinTech, BigTech and Competition during the 2020 OECD Competition Open Day.
The substantial growth of BigTech firms, such as Amazon, Google, Facebook and Apple, in terms of customer base, international presence, and use of customer data, has drawn the attention of practitioners and policy makers to the potential for such firms to leverage their competitive advantages to compete in segments of financial services.
BigTech is a particular case of FinTech, which is broadly speaking the use of technology and innovation to deliver financial services outside of the traditional bank branches. The FinTech revolution is already substantially changing the delivery of services, the nature of intermediation and competition in the market. The ubiquitous use of mobile devices has expanded the availability of financial services by allowing for mobile payments (wallet), money transfers (remittances) and online shopping. The integration is particularly advanced in Asia where payment apps are currently serving more than one billion users, providing e-commerce, chat, goods deliveries, food ordering and ride-hailing. At the same time, digital disruption is spurring incumbents to improve efficiency and customer care, and generally allows for a more competitive market for financial services that notably better serves underbanked communities.
In particular, disruptions from FinTech start-ups have had a significant impact on the financial ecosystem: some statistics point to
- 85% of banks having made digital transformation a business priority;
- 3 out of 4 global consumers using FinTech services for money transfers;
- 77% of financial institutions wanting to innovate more;
- 60% of traditional banks stating they would team up with Fintech start-ups, and 82% expect these partnerships to expand within the next 5 years.
So far, traditional banks and payment services such as Visa and Mastercard remain the leaders on the market for transaction payments – especially in the OECD member states – but nonbanks such as Apple pay, PayPal or Google, and new entrants such as Revolut, N26 or Starling Bank have made payment innovations. In jurisdictions where only few people have bank accounts, mobile pay and other mobile-based payment schemes have had a significant impact by disenfranchising underbanked communities, lowering switching costs and allowing for innovative approaches to payment services.
On the demand side, consumer expectations have increased, driven by the digitalisation of transactions and an emerging app-based culture that has changed the way people order food or local transport and interact with each other. Customers now expect speed, convenience, real-time transactions and user-friendliness of financial services that used to be at odds with traditional banking.
Incumbents are at a disadvantage, left with obsolete legacy technologies, networks of branches and significant overcapacity (or the wrong type of capacity) while FinTechs offer significant efficiency gains, with a more effective screening of candidates for loans, using superior technology, while requiring fewer personnel and often no physical branches.
As for BigTechs, they have all of the advantages of the Fintechs, “but none of the drawbacks”. They already have a large customer base and benefit from considerable brand recognition. They have access to data about their customers that provide information on solvency, preferences and habits. They have a captive ecosystem with high switching costs for existing customers and are able to exploit both scale and scope economies and highly efficient technology to provide financial services, potentially posing more threats to traditional banks than FinTechs.
The panel discussion on the Open Day on 26 February will discuss drivers of increased competition from technology-enabled new-comers; the nature of competition from FinTechs and BigTechs; whether BigTech entry really leads to more competition; and what regulatory responses have been identified in the area of competition.
Competition or co-operation?
Will the emergence of new non-bank entrants lead to more competition in retail banking? It is not clear that the increased price transparency afforded by the Internet necessarily promotes more competition. It can also be used as a signal by competitors of how to strategically price products. Nonbanks have entered thanks to lighter regulation, but incumbents may respond by more aggressive tactics to attract customers, or possibly choose to accommodate new entrants by offering partnerships, such as ApplePay. Incumbent banks may also try to fight, for instance by limiting access to vital infrastructure or through pre-emptive take-overs.
BigTech on the other hand, has quite different businesses to FinTechs. They control customers’ shopping experiences, as well as the distribution and commercialisation of suppliers. Combined with deep pockets, Big Techs could achieve scale and scope in financial services very quickly, especially in markets with network effects, such as payment and settlement services, lending and insurance. Moreover, BigTechs have the ability to cross-subsidise financial and non-financial products. When dominant, BigTechs have successfully discriminated in favour of their own products or upstream/downstream affiliates.
Increased competition or market dominance?
So in the short term, competition in retail banking and financial services is set to increase, but the longer term outlook is more uncertain. In the case of BigTech, the link between entry and competition is not clear. BigTech can establish and entrench market power through their control of multi-sided platforms and data and potential competitors have little scope to build rival platforms. Moreover, dominant platforms can raise entry barriers to consolidate their position, using their market power and network externalities to raise switching costs for users or exclude potential competitors.
BigTechs can also use their superior data to price discriminate and extract rent – i.e. using the data to assess not only a consumer’s creditworthiness, but also the highest interest rate the borrower would be willing to pay for a loan.From a welfare point of view the effect is ambiguous: the customer gets the product at the highest price they are willing to pay – but the surplus value is no longer shared between the firm and the customer; rather the firm gets all the rent. In addition, there are no distributional benefits in terms of higher productivity. Moreover, algorithms may exclude certain high-risk groups from socially desirable insurance markets, or develop biases towards minorities, as is evidenced for instance in some recruitment algorithms.
At present, there is no agreement between regulators on the desirability of competition in banking. Increases in competition in many jurisdictions thanks to FinTech have delivered more innovation, more efficient services, better customer care, and banking for hitherto underbanked population segments. On the other hand, some argue that a more concentrated and less competitive banking sector is more conducive to financial stability because incumbents in protected markets can accumulate a strong equity base and become more profitable.
To ensure financial stability, banks are subject to regulation that governs their activities, and market entry requires strict licensing. As such, when Tech firms engage in actual banking activities, they should be (and often are) subject to the same regulations that apply to banks. The aim is to close the regulatory gaps to avoid regulatory arbitrage (shadow banking activities). In the case of BigTech entry however, the policy response requires a more comprehensive approach that encompasses not only financial regulation, but also competition and data privacy objectives.
Moreover, the traditional tools of competition authorities to gauge market power (firm size, pricing, concentration), are ill-suited to the case of BigTechs in finance. Recognising this, several jurisdictions for instance, the EU Germany, India, the UK and the US, are upgrading and revising their analytical toolbox to deal with digital markets. For instance, the UK’s CMA launched a new Digital Strategy in 2019, which – among others – creates a specialised unit to deal with the digital economy.
In particular, the tools that aim at traditional financial regulation may also hamper competition and data privacy objectives and thus the interaction between policy goals and tools may imply complex trade-offs that need to be carefully assessed.
 This discussion draws in parts on the background note by Xavier Vies, prepared for the OECD Competition Committee Roundtable discussion on Digital Disruption in Financial Markets in June 2019: www.oecd.org/daf/competition/digital-disruption-in-financial-markets.htm
 Firms such as Alibaba and Tencent in China are prominent examples.
 See Vives, X. (2019): “Digital disruption in banking”, Forthcoming in The Annual Review of Financial Economics, 2019.
 In 2017, Google was fined EUR 2.42 billion by the EU Commission for anticompetitive behaviour, having used its online search engine to give advantage to its own shopping service.
 See BIS Annual Economic Report 2019, Chapter III “Big tech in finance: opportunities and risks” for a good discussion on the topic. Some of the points in this section are from the chapter.
“Google’s algorithms discriminate against women and people of colour”: http://theconversation.com/googles-algorithms-discriminate-against-women-and-people-of-colour-112516
New Scientist (2018): “Discriminating algorithms: 5 times AI showed prejudice”, www.newscientist.com/article/2166207-discriminating-algorithms-5-times-ai-showed-prejudice/
 See BIS, Annual Economic Report 2019, Chapter III.
 See BIS, Chapter III, op.cit.
2020 OECD Competition Open Day Blog Series