The Financial Conduct Authority (FCA) has released a feedback statement regarding the entry of Big Tech companies into the retail finance sector. The FCA is trying to ensure competition between Big Tech and traditional financial services firms can develop effectively and fairly. The question is: will traditional banks and fintechs be able to keep up with these tech giants? And is Big Tech a bigger threat to traditional finance than fintech?
In response to Big Tech companies such as Amazon, Apple, X, and Google entering the finance sector, the FCA called for feedback from the market as it considers new regulation. In the recently released feedback statement the FCA reviewed feedback on, for example, the potential benefits and harms of this competition, as well as regulatory concerns and ideas for next steps.
The feedback statement released by the FCA outlines its growing concerns surrounding international competitiveness: “Several respondents flagged that, as global companies, Big Tech firms have access to multiple markets across multiple jurisdictions. These respondents suggested that the FCA should consider in greater detail how future regulatory proposals may impact investment decisions in UK financial services, relative to other regions.”
In addition, the FCA outlined how they would review mergers and acquisition, as the report suggested this may be the entry strategy by Big Tech firms into the finance sector. Other areas highlighted within the report surrounded consumer protection, how Big Tech firms could act as “pseudo-regulators” on their platforms, and the position of digitally excluded individuals in a Big Tech-dominated financial scene.
The question is also how fintech start-ups such as Starling, Monzo, and Revolut will compete if Big Tech corporations begin entering into the finance sector – particularly as these tech giants already have millions of loyal customers?
Furthermore, what would the introduction of digital banks would mean for those without access to online services? Would the Big Tech companies support those individuals with getting set up and make the banks more accessible?
One advantage offered by Big Tech is that they aim to be one-stop shops: more accessible, faster, and more user-friendly than those offered by banks and other financial institutions. Tech firms also have the potential to become dominant through the advantages afforded by the data-network-activities loop, although this does raise competition and data privacy issues. How will traditional banks respond?
Rather than trying to compete, they could take measures to try and stifle Big Tech’s growth into finance. Financial advisors are beginning to warn banks that strong steps need to be taken before Big Tech stops using intermediaries and begins to scale in the financial sector. Many consultants suggest that banks should respond now before big tech companies scale as it will be harder to compete on price and loyalty built between the companies and customers.
Big Tech companies’ interest into the finance sector have been subject to legal and regulatory attention. In January this year, Google was sued by the US Justice Department for monopolising digital advertising technologies. Meta designed the Diem cryptocurrency, a blockchain-based stablecoin payment system, but stopped due to regulatory concerns. X CEO Linda Yaccarino has openly said banking and finance services are the focus for the media platform:
Some critics have argued X is potentially becoming an “everything app,” something akin to China’s WeChat. Controlled by one central app, WeChat encompasses banking (WeBank), messaging, social media, payments, subscriptions, utility bills, food deliveries, plane and train tickets, ride hailing, and more. Musk has not been discrete about his ambition to create such an app for Western markets: “in the months to come, we will add comprehensive communications and the ability to conduct your entire financial world.”
While WeChat is by far the most prominent app in China, WeBank has no physical branches or outlets, and does not rely on property guarantees. Instead, it grants loans through face recognition technology and big data credit ratings. In May 2015, WeBank launched WeiLiDai, its “micro-loan” suite of inclusive financial loan products. Founded in 2014, WeBank has grown to be the most popular digital bank in China, mainly because of its inegration with the main WeChat platform. If Big Tech continues to try to infiltrate the finance sector, will other digital banks such as Starling, Monzo, and Revolut find Western tech companies becoming similarly dominant?
A report from the World Economic Forum (WEF) cites cloud computing, customer-facing artificial intelligence, and Big Data customer analytics as three domains that are becoming ever more crucial to competitive differentiation among financial firms.
All are areas in which technology giants such as Amazon, Google, and Facebook have acquired more experience than their financial services counterparts. Jesse McWaters a financial services expert and lead author of the WEF report, said: “The partnership between banks and large tech companies risks not staying a reciprocal one.
“Financial institutions increasingly rely on technology firms for their most strategically sensitive capabilities, but can so far only offer their ongoing business in return.”
In the WEF’s view, while those partnerships can accelerate innovation, they also pose a risk, in the event of large technology players entering the financial services market in direct competition with banks and insurers.
“Tech giants would be able to pick and choose their points of entry into financial services,” McWaters states, “maximising their strengths such as rich datasets and strong brands, while taking advantage of incumbent institutions’ dependence upon them.”
Another author of the report Deloitte Canada noted: “fintechs have changed the basis of competition in financial services, but not the competitive landscape.
“Fintechs now define the tempo and direction of innovation in financial services – but high customer switching costs and the rapid response of incumbents has challenged their ability to scale.”
What next? Following the report, the FCA have stated that: “as the new Digital Markets, Competition and Consumers Bill passes through Parliament; at a appropriate time, we will set out the details of how we will implement the regulatory coordination provisions in the Bill through a memorandum of understanding.”
For now, it seems traditional banks and fintechs will have to continue to build stronger relations with their customers and begin establishing more competitive prices to prepare for Big Tech’s entry into the finance sector. Will this be enough though? Only time will tell.
Author: Bronwen Latham
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