Technology-enabled innovation in financial services (known as ‘FinTech’) has led to the creation of new business models, applications, processes, products and digital currencies.
It is rapidly impacting how banking, payments, wealth and asset management, personal finance and insurance services are being provided. Competition between incumbent financial service providers, big non-financial firms (including so called ‘BigTechs’, such as internet platforms and telecoms operators) and start-ups has escalated.
In its recently published document ‘Programme for Government – Our Shared Future’ the Irish Government committed to “develop the FinTech sector as a source of employment and competition”. The context of the document suggests that FinTech will be a source of competition for traditional banks. While the document did not elaborate on how it would achieve this objective, it could involve several factors including:
- providing support to start-ups, to firms looking to relocate to Ireland or scale their FinTech activities;
- promoting innovation, for instance, by encouraging early engagement between FinTech firms and regulators via ‘regulatory sandbox’ initiatives (such as via the Central Bank of Ireland’s Innovation Hub); and
- preserving consumer and market trust and confidence in FinTech by addressing sectoral challenges related to regulatory compliance and supervision.
In addition, certain issues which have the potential to impede competition in the provision of FinTech services may need to be addressed. Such issues were discussed in a December 2019 report to the European Commission by an Expert Group on Regulatory Obstacles to Financial Innovation (‘ROFIEG’) which made 30 recommendations on how to create an accommodative framework for FinTech in the EU.
Payments services featured prominently in ROFIEG’s report and are the FinTech services that EU competition authorities are currently paying the most attention to. Two competition issues in the payment services sector relate to access to data and access to platforms.
Access to Data
The second EU Payment Services Directive (2015/2366/EU or ‘PSD2’), which came into effect on 13 January 2018, enabled authorised third-party providers to compete with banks by allowing bank customers to use those -third-party providers to manage finances and initiate payments on their behalf. With the consent of the customer, banks are now required to permit third-party providers to access payment account data through open application program interfaces (APIs), and may not discriminate (other than for objective reasons) against:
- payment orders via third-party providers (in terms of timing, priority or charges) by comparison with payment orders made by customers themselves; and
- data requests via third-party providers.
As a result, third-party providers can now build services on top of a bank’s existing data and infrastructure. ‘Challenger banks’ such as Revolut now can provide ‘Open Banking’ services to Irish customers, allowing them to track their spending and set budgeting controls for their Revolut and other Irish bank accounts via the Revolut app.
However, PSD2 also paved the way for BigTechs to enter the market for payment services. A concern raised by ROFIEG is that BigTech entrants’ existing access to significant ‘non-financial’ data (e.g. data on customers’ spending patterns and purchasing habits) could lead to an asymmetric position in the market. Without appropriate regulation, they could become oligopolies which may ‘lock customers into’ their platforms and promote only their vertically integrated services. This may allow them to leverage their dominance over data access to support their business in downstream markets.
The ROFIEG report suggests that a way to level the playing field, is to make ‘non-financial’ customer data held by BigTechs accessible by other firms, subject to customers’ consent.
Access to Platforms
Another issue addressed in ROFIEG’s report is the concern that dominant FinTech firms may prevent access to devices or software or grant access but under restrictive conditions (such as a prohibition to use other consumer interfaces). ROFIEG’s view is that investigating this activity as abuse of a dominant position under competition law, is a reactive instead of proactive solution and may not effectively prevent the issue from arising, leaving consumers and other market participants exposed to a dysfunctional market long before competition authorities are in a position to intervene. Therefore, its report recommends the introduction of ex ante rules to prevent large, vertically integrated platforms from discriminating against product and service provision by third parties.
One example given by ROFIEG’s report relates to smartphones’ in-built ‘Near-Field Communication’ (NFC) chips. An NFC chip allows two electronic devices to communicate when they are within 4cm of each other. They are often used to enable contactless payments to be made. ROFIEG’s concern is where providers of smartphone operating systems reserve access to their smartphones’ NFC chips to their own mobile payment solutions.
Germany’s solution to this issue was to introduce legislation taking effect on 1 January 2020, to require providers of technical infrastructures (such as NFC chips) that may contribute to the provision of payment services or the operation of e-money activities to give access to those infrastructures in return for “an appropriate fee”.
On 16 June 2020, the European Commission opened a formal antitrust investigation on foot of a concern that Apple Pay is the only mobile payment solution that may access the NFC chips in iOS mobile devices for payments in stores. The Commission also had concerns in respect of alleged restrictions of access to Apple Pay for specific products of rivals on iOS and iPadOS smart mobile devices, and that Apple’s T&Cs and other measures related to the integration of Apple Pay for the purchase of goods and services on merchant apps and websites on iOS/iPadOS devices may distort competition and reduce choice and innovation.
Ongoing Consultations on FinTech in the EU
The above are just two examples of issues identified by ROFIEG which may need to be addressed to create an accommodative framework for FinTech. ROFIEG’s report has preceded a number of European Commission consultations on strategies that are expected to be published in Q3 2020, namely:
- The strategy on an integrated EU Payments Market; and
- The Digital Finance Strategy/FinTech Action Plan.
In addition, certain EU member states’ competition authorities are currently carrying out studies into FinTech and competition:
- In October 2019, at the request of the Dutch Minister of Finance the Dutch Authority for Consumers and Markets initiated a market study into the activities of BigTechs on the Dutch payments market.
- In March 2020, the French Competition Authority launched a public consultation on the fintech sector in France, with a particular focus on payment services.
The Irish Government will inevitably be paying close attention to these EU-wide developments in seeking to achieve its objective of developing the FinTech sector as a source of competition.
Given the rapid growth and innovation in the FinTech sector, and its increased importance to the Irish economy, particularly in the wake of COVID-19, the Irish Government will need to be in a position to respond on a timely basis to ensure that the factors that allow competition to flourish in the sector are not hindered. However, where any ex ante regulation is proposed as a way of rectifying competition concerns in the market, it will need to be considered very carefully so as to avoid any unintended consequences such as harm to incentives of market participants or prospective entrants, and as a result, the innovation that has been so prevalent in the FinTech sector in recent years.