BigTech vs BigBang: Competition in Financial Services

By Janos Barberis, Founder and CEO of SuperCharger. The topic will be discussed at the panel FinTech, BigTech and Competition during the 2020 OECD Competition Open Day.

On 18 June 2019, Facebook announced the launch of Libra, a decentralised digital currency, or stablecoin. Borderless, it has the ambition to be used by 2 billion people. Policy makers’ reaction was swift but ultimately their efforts amount to only slowing down a more significant trend: the entrance of BigTech in finance. Indeed, to maintain their user growth and share price, tech companies are after the next two big B’s. The next Billion customers they can serve and the next Billion dollars of market capitalisation they can capture. Finance has both.

The last decade has shown us the risk of the financialisation of the economy. Policy makers’ focus since the global financial crisis (GFC) of 2008-09 has been about rebalancing the power gained by big finance. New capital reserves for systemically important financial institutions (SIFI) and personal liability regimes have been introduced in this respect to control firms that have become “Too-Big-To-Fail”.

Libra has triggered the trip-wire that is the regulation of BigTech. When opening this policy agenda, we need to remember the opportunities and risks for the upcoming decade: the datafication of the economy and the rise of BigTech. Now is a perfect time to open an un-addressed question: How can we (re)balance the power of BigTech firms that have become “Too-Big-To-Care” about fixing their negative externalities? To be more precise, we are looking at the impact of BigTech in financial services (i.e. Google as a market maker, Facebook as a central bank or Amazon as banking infrastructure).

“The ‘villains’ have been the ‘heroes’ during the preceding boom” – Peter Drucker

The caution towards BigTech is warranted. The unbundling of financial services has been spurred by FinTechs and has introduced more innovation and competition. However, this decade will see a new re-bundling of finance which implies a platform strategy. In this area, BigTech have gained unparalleled experience and therefore a competitive advantage over incumbent banks.

BigTech business models are built on network effects, and there is no reason why they will not apply this logic as they enter financial services. The more people use Libra, the more utility it creates, the less the need for an alternative. In other words, whist FinTech brought competition, BigTech will bring concentration. What is more, BigTech, just like FinTech before is exploiting regulatory arbitrage to enter markets.

In Europe, the General Data Protection Regulation (GDPR) applies indiscriminately to Banks or BigTech, pushing them to structure their customer data to know who is affected by a breach. However, combined with the Payment Systems Directive 2 (PSD2) which applies solely to financial firms, the data syphoning becomes unilateral going from Banks towards Big Tech, and not vice versa. Furthermore, directors’ liability and remuneration limitation that has been imposed post-GFC does not apply to BigTech firms. For start-ups, being acquired by a BigTech wishing to enter financial services instead of a Bank wishing to renew itself, is more rewarding and less risky.

In the US, a similar pattern can be found. 20 years ago, it was not apparent why banks couldn’t just become large tech companies. Indeed, during the 1999 hearing for the Financial Services Modernization Act, JP Morgan offered to sell its spare datacentre companies to (e)commerce companies. However, this was rebutted, as a one of the core principles in US financial law is the separation between banking and commerce, pursuant to the Banking Holding Act (BHA) of 1956 and to some extent the Gramm-Leach-Bliley Act (GBLA) 1999, which limits direct equity ownership of banks in entities not related to banking. In other words, regulation makes it prima-facie harder for a Big Bank to become a BigTech, than the opposite.

Of course all is not negative, BigTech plays the catalyst of transformation of a different, not simply better, financial services. The fact that the issuance of sovereign stable coin tops regulators’ agenda, is a case point.

Reform is in order, but the approach will be complicated, akin to playing a game of 12 dimensions regulatory chess. Some of these dimensions are financial, privacy and antitrust law.

When things get complex – go back to basics

Policy makers have a narrow window of opportunity to create change and should consider, at least, the following 5 dimensions:

Firstly, regulation of platforms cannot merely be a technical exercise. The break-up of Facebook or Amazon is expected to reduce systemic risk, increase competition, boost shareholder value and more besides. In the US, the sum-of the parts of the Standard Oil Company break-up was higher than the original companies. More recently in China, Ant Financials spin-off from Alibaba created the 10th largest financial group in the world, valued at USD 150 billion.

Indeed, regulation needs to become “smart” and regulates the networks themselves, not just their (negative) effects. In other words, we cannot have analogue regulation in a datafied economy. Advances in Regulatory Technology (RegTech) is a demonstration of a convergence between technical capabilities and ambitions of regulators in this topic.

Secondly, regulators need to make sure that BigTech understand that their current stance towards technological neutrality is not an invitation to self-regulation. Regulators need to start evaluating how a new technology or a business model impacts markets, if at all. Doing so should avoid regulators preventing the next big innovative breakthrough whilst focusing on regulating a fad.

Thirdly, the approach needs to be co-ordinated. Size matters when forcing change, because harmonisation limits arbitrage and makes market bigger. However, this has its own difficulty, Data sovereignty sounds like a new tech nationalism. China has shown that is it possible to ring-fence not just one’s financial market but also one’s digital economy. Arguably, GDPR was similarly a trade-barrier as much as it was a privacy law.

Fourthly, a shift of ideology needs to happen. The free market movement of the late ’70s and its invisible hand has pinched us already, with the GFC of 2008. This is about to happen again with the growing monopolistic power of BigTech. The liberal movement has arguably changed the Antitrust doctrine, favouring consumer welfare (defined by price) over market efficiency (defined by competition).

Finally, one needs to define the new role of capitalism in an economy of intangibles. Capitalism in a world without Capital? To do so, there is a need to revive the doctrine of economic structuralism that prevailed post-war and take a literal meaning to the idea of “regulatory architecture”. After all the BigTech are also reshaping our economies. Amazon is redesigning the backbone of the internet, Uber our transportation system and, more controversially, Facebook may already have altered the political landscape of countries.

Regulators and policy makers have the opportunity to design a society that reflects newer values, such as the one embedded in the sustainable development goals (SDGs). The reform should be a bi-partisans effort, making it not about left and right, but about right and wrong.

We live in interesting times….

2020 OECD Competition Open Day Blog Series

Blog 1: Collective bargaining 4.0: using labour law to extend coverage to new forms of work

Blog 2: Competition enforcement could help labour markets function better

Blog 3: Charting the way forward for digital competition policy

Blog 4: Innovation and Competition in Financial Markets

Blog 5: BigTech vs BigBang: Competition in Financial Services

Blog 6: Merger enforcement in dynamic and innovative markets

Blog 7: Protecting consumers’ interests in digital markets – The experience of Australia

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