Few would deny the capacity for fintech to deliver significant benefits to customers across financial services, from banking and payments to digital currencies, wealth management and insurance.
A recent study – Competition issues in the Area of Financial Technology – published by the European Parliament notes fintech's "…enormous potential in improving financial inclusion…[and] providing more easily accessible and affordable financial services to large masses of the population and small and medium-sized enterprises".
That said, the application of competition law to fintech presents unique challenges for authorities, as well as those advising the dynamic businesses that inhabit this space.
Most if not all antitrust analysis is predicated on analysing the relevant agreement or conduct by reference to the markets affected by it and the positions of the parties concerned. The starting point usually involves defining the relevant market and assessing the market power of those involved.
Such exercises are difficult in fintech where the technology and services provided constantly evolve and cannot be categorised decisively. Even their broad areas of application – defined by the study as banking; payments, transfers and forex; digital currencies; wealth and asset management; personal finance; insurtech; and enabling technologies and infrastructures – do not reflect the diversity of products and services on offer. For example, banking involving fintech-supported alternative finance can be broken down into a range of more specific offerings, such as P2P consumer lending, P2P business lending, invoice trading, crowdfunding (equity, reward, real estate and donation), balance sheet lending (business and consumer), debt-based securities, mini-bonds and profit sharing.
The extent to which these new propositions compete with each other and with established providers and products (such as loans, mortgages and credits cards in the lending space) needs careful consideration. This involves calculating market boundaries and size and trying to understand the parameters of competition within.
Market analysis is complicated by the pace at which fintech is growing. Quoting 2018 data from Crunchbase, the study estimates that there are more than 3,850 fintech service providers in the world, mostly based in the US, China, the UK and India and most founded since 2010. However, a review of the same platform in August 2018 suggests that this number is already approaching 4,400 (for-profit providers).
The volume of alternative finance is also increasing dramatically. In the EU, volumes rose from €1.127 billion in 2013 to €7.671 billion in 2016. Finally, the majority of alternative finance platforms continue to report changes to their business models across all product types. In 2016, 70% of those engaged in P2P business lending reported a change to their business model (36% reported a significant change) whether to address increased competition, regulator attention or otherwise.
While it might be premature to draw any specific conclusions from these trends – for example in terms of markets characterised by low barriers to entry or low levels of consolidation – the challenge for regulators to identify the scope and size of any underlying markets (and the positions of those within them) is considerable. It follows that any conclusion regarding associated antitrust issues will be tentative, and may be moderated by the desire not to over-regulate or intervene prematurely.
Notwithstanding these challenges, the European Parliament is focusing its research on certain competition issues that may be common across the fintech sphere, which may provide some thematic guidance on areas of future scrutiny.
The study considers two broad perspectives:
• The supply-side perspective, with a focus on the importance of online platform technologies (which put users with matching needs in contact with each other – the supplier or advertiser on the one hand and customer on the other) as well as the importance of data in conferring a competitive advantage, who has access to that data, the technologies analysing it and how the results are then used.
• The demand-side perspective, which considers how users access and operate fintech technologies, compatibility issues with other technologies and industry standardisation (also a supply-side issue), the extent to which fintech technologies may be used to differentiate or discriminate between users or groups of users, and how users perceive fintech technologies and the underlying services.
In adopting this approach, the study elaborates on some more specific issues that have the potential to affect fintech (not all of which should necessarily be dealt with by competition law).
The study observes that the definition of relevant markets involving multi-sided online platforms cannot follow traditional models given that getting users from both sides on board is fundamental to the success of each platform and to understanding their pricing strategies. This is not a novel issue, nor is it exclusive to fintech; ever since the days of Diners Club and dating agencies, the 'platform' has recognised that it takes two to tango.
The study suggests that market definition should consider both sides of the platform, but with potentially different outcomes depending on the nature of the interactions between users. For transaction markets (those involving an observable transaction between users on either side, such as payment card schemes or an aggregator referring consumers to insurers) it makes the argument (albeit not one that is consistently followed by authorities) for the definition of a single intermediation market relating to the underlying product or service (which may draw in other distribution channels).
For non-transaction markets (those that do not involve a direct transaction between users on either side, like search engines (to some extent), social media, TV or news sites with users or subscribers on one side and advertisers on the other), the study implies a case for defining separate (albeit interrelated) markets. This may be because, in the non-transaction scenario, it is possible that other products or services compete with one side of the platform but not the other. For example, advertisers who wish to reach consumers may regard TV, print and online channels as substitutes for each other, but the substantive content of these channels may vary and be regarded by users as distinct (i.e. news, entertainment etc.).
In the context of fintech, this approach may make it easier conceptually for authorities to address upstream behaviours or bottlenecks (such as controlling access to data) that might foreclose competition and harm innovation downstream.
A related competition challenge noted by the study is the issue of network effects. A characteristic of multi-sided markets is that they generate network effects or user inter-dependencies, which might confer market power on the platform in the middle. The value a customer derives from a payment service (and the potential 'stickiness' of that customer to it) depends partly on the number of retailers accepting that service and vice versa. Indeed, it is not always profitable to charge a direct price to end users; often, more can be gained from monetising access to that audience by advertisers. Competition for the audience therefore becomes critical. The fact that a platform does not charge a direct fee to end users does not mean that this side of the platform is not a market, nor should the absence of profit attributable to that market be read as the absence of market power.
With network effects, the concern is that once a threshold of users is reached, it enables a popular, established platform to be insulated from competition from smaller rivals, thus creating barriers to entry or even resulting in market exits. In other words, as the large platform grows, network effects make it increasingly difficult for new competitors to challenge its position until a tipping point is reached – creating a 'winner takes all' scenario, which in turn results in high levels of market concentration and potentially higher prices.
While there is some logic to this, authorities should be wary of emphasising it too strongly. History shows that advantages attributed to incumbents can soon be lost. In 2006, as part of its Classified Directory Advertising Services (CDAS) market investigation, the UK's then Competition Commission (CC) concluded that the "…incumbency position…" of Yell, the provider with the largest classified directory in the UK, was "…reinforced by the network effects present in this market…" so that "Other providers wishing to expand have to build usage in order to attract advertisers. This requires investment, particularly in usage advertising, and acts as a barrier to expansion."
According to the CC, this conferred market power on Yell leading to distortions of competition, which justified various CC remedies (adopted in 2007) including a price control. The CC estimated Yell's share of CDAS to be around 75%. Fast forward several years, and in 2013, the CC – relying on 2010 data – reported a "change of circumstances". The data showed a paradigm shift in UK consumers' first choice of media when searching for goods and services with 46% citing the internet and 21% the Yellow Pages – a complete reversal of the percentages recorded in 2006. This in turn had led to a 63.5% decline in Yell's revenues.
Parallels can be drawn with social media. Between 2005 and 2008, MySpace was the most visited social networking site in the world with revenue topping $900 million and around 100 million users. However, in 2008, Facebook (a business that MySpace had had the opportunity to acquire in 2005 for $75 million, when Facebook had around only 5 million monthly users) overtook MySpace. Today, while around 15 million users still visit MySpace, its larger rival can boast more than 2 billion.
This pattern may not always be replicated, but it questions the emphasis placed on network effects in any market power debate, particularly in dynamic markets where the cost of switching is minimal or limited and users can easily multi-home (whether, say, using multiple comparison websites to compare products or choosing between alternative payment options to buy them). That said, while single-homing might reinforce network effects, it also offers user benefits given the time savings and other efficiencies that it affords. Certain platforms are popular for a reason.
Furthermore, while Facebook, for example, has reigned in social networking since 2008, it continues to face competition from a wide range of other sites that have managed to differentiate themselves (including Twitter and LinkedIn). The same principles may apply to many fintech segments (at least for front end services), regardless of any incumbency advantage on the part of the largest players. Nevertheless, the study notes the potential for network effects to affect competition between digital currencies (the inter-cryptocurrency market) and competition between exchanges (the intra-cryptocurrency market), as well as associated sub-segments, for example mining, exchanges and wallets.
The study opines briefly on the potentially conflicting competition issues arising from technological interoperability and standardisation.
On the one hand, there is a potential concern that an active pursuit of non-interoperability by incumbents can deter competition if it renders access to a market difficult. At the same time, industry standardisation – which can positively address this issue by lowering entry costs and prices – may also give rise to unwanted side-effects, such as oligopolies where platforms choose to split the market between them.
In the context of fintech, the study comments on the standardisation of distributed ledger technology and other technical protocols, which may have the potential to affect market entry or have an impact on current costs.
That said, taking other standardisation initiatives as examples – such as the UK's Open Banking initiative – it would appear that standardisation (at least when based on fair, reasonable, and non-discriminatory licensing) or driving greater interoperability through open APIs (to deliver a more user friendly, frictionless service) are the current priority for anti-trust authorities.
The study acknowledges that control over access to data will be a focus for competition regulators when considering fintech markets. It references payment services and personal finance, as well as the potential knock-on effects on artificial intelligence and data analytics.
Depending on the market context, potential concerns may range from denying competitors access to key data (resulting in foreclosure) to entering exclusive contracts and tying or bundling behaviours.
The study speculates that the arrival of digital currencies promoted by banks is likely to reshape competition in the cryptocurrency market. While increasing the overall levels of competition, the potential, in theory, for banks to limit competition in the cryptocurrency market through pre-emptive acquisitions or predatory pricing schemes is considered.
The study also notes the potential for the use of computer algorithms to result in anticompetitive practices, whether facilitating (express or tacit) operator coordination or simply because they can learn by themselves and conclude that the best way to maximise profits is to collude.
Attention is focused on the use of algorithms in the provision of wealth management services and insurance. While recognising the potential for algorithms to facilitate collusion or deliver other suboptimal consumer outcomes, the study also acknowledges their positive effects, such as increased price transparency and improved product development.
Notwithstanding the generally fluid and fragmented nature of many fintech segments, the study also observes that there are some specific cybersecurity technologies and advanced cloud services that are characterised by high barriers to market entry, where market concentration and potential competition concerns might occur.
The state of the markets for fintech services are still evolving, so it is too early to say which competition challenges will require the deployment of competition tools (merger-related or behavioural) on a significant scale.
According to the study, one of the main obstacles for the development of an even more competitive market in, say, banking platform markets (where multi-homing is common) is a lack of clear regulatory standards, as opposed to existing anti-competitive behaviours.
Competition policy and intervention will therefore have to consider the underlying tension between improving accessibility and usability of financial services through fintech on the one hand and facilitating investment and rewarding innovation on the other – while assuring consumer trust and good consumer outcomes. All of these elements are essential for the effective functioning and stability of the financial system.
In any event, while the need for a paradigm shift in traditional competition law analysis for fintech markets may exaggerate the issue, it is clear that some recalibration will be needed to address some of the future challenges that are unique to this sector.
This article was first published in Payments & Fintech Lawyer
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