I cannot post a 222-page PDF from the US Government on FinTech and competition without also posting a 136-page PDF from the European Parliament on FinTech and competition. Also released last week, this is a report prepared by the policy department of the European Parliament at the request of the ECON Committee. The EU document has a different focus to the US one, which allowed national FinTech charter bank licenses to be given to FinTech firms by the OCC.
After some preamble, the document focuses on the issues faced in regulating and encouraging competition in a platform market comprised of many players in an ecosystem. My words, not theirs. They call it “multi-sided online platforms” which I find slightly more clunky, but here’s the core part of the Exec Summary worth sharing with y’all:
The use of multi-sided online platforms to provide FinTech services implies that the definition of the relevant market cannot be undertaken following traditional models built on the premises of pipeline businesses where value is generated by the supplier of a product or a service. In the case of platforms, the value or a large part of it, is generated by the users on the other side. The second competition challenge resulting from the combination of platform dynamics and users’ perception and behaviour is the generation of network effects. FinTech platforms are not as regulated as financial trading platforms, and therefore the challenges arising from network effects need to be assessed as a competition challenge. These challenges include the risk that multi-sided network effects enable a large platform to be insulated from competition from smaller platforms with fewer participants and can create barriers of entry. Other factors may be at play that modulate the intensity and features of the network effects, and their influence on the potential competition issues. It is particularly relevant whether users tend to choose only one provider (‘single homing’) or several providers (‘multi-homing’). Network effects increase with the intensity of use and the single-homing nature of the platforms.
Interoperability is another potential anticompetitive factor related to platforms. An active pursuit of non-interoperability can act as a deterrence with anticompetitive effects if access to the market is difficult or costly.
Standardisation also plays a relevant role in the field of competition between FinTech providers. If standardisation lowers entry costs, and prices, and/or allows firms to compete on more core parts of the service, then it has a positive effect. However, standardisation may also result in an oligopoly where providers may take the opportunity to agree on features of the service to split the market between them.
Access to data may become another competition issue in the FinTech ecosystem. Therefore, the role of data to establish a competitive advantage needs to be borne in mind as one of the elements involved in assessing the competitive position of the company resulting from a merger. Control over unique data troves, resulting from the combination of datasets from multiple sources, should also be one of the main factors considered when assessing potentially anticompetitive behaviours. They can result in, for example, exclusionary conduct when not allowing competitors to access data, the conclusion of exclusive contracts, if the incumbent uses its control over a particularly valuable dataset to create a network of contracts that forecloses competition, or tying and bundling of services, leveraging the firm’s position and imposing the use of other services.
Computer algorithms themselves may also result in anticompetitive practices. They may do so in a way that promotes express and tacit collusion because they can learn by themselves and conclude that the best way to maximise profits is to develop collusive practices.
The document goes on to talk about each sector of the market and where the issues may arise, although it does mention that many of these issues have not yet arisen. That’s why the conclusion is that “the current state of the markets for FinTech services is generally too fluid to reach firm conclusions on the existence of competition challenges that need the deployment of competition tools on a large-scale basis. The special role of regulation in the field of financial services sends a message of caution about the appropriateness of competition policy tools as the preferred means to address every challenge. FinTech services, as part of the digital economy, share potential competition challenges with other digital businesses, mainly those derived from the provision of services through digital platforms and the access to customer data. Thus, the remarks regarding competition in the digital environment remain valid in the FinTech ecosystem.”
All sounds a bit vague and Brexity to me, but who am I to challenge?
Anyways, it is worth a read, particularly their views on the market players and segments. You can download the full report here.