On 24 November 2023, the Financial Conduct Authority (FCA) published a Call for Input on the potential competition impacts arising from the data asymmetry between Big Tech firms and firms in financial services. The Call for Input follows the FCA’s October 2022 Discussion Paper regarding the potential competition impacts of Big Tech entry and expansion in retail financial services, and its July 2023 Feedback Statement summarising the responses to the Discussion Paper. [1]
The Call for Input primarily seeks stakeholder feedback on whether any data asymmetry between Big Tech firms and financial services firms exists, what the strategic relevance of such data asymmetry might be, and what impact it might have on competition in the financial services sector.
Data asymmetry
The Call for Input highlights that the increasing digitalisation of financial services, which has accelerated following the COVID-19 pandemic, has empowered data and technology to drive changes in financial services markets, producing new products and ways for firms to engage with their customers.
At the same time, data is one aspect that many Big Tech firms have in common – specifically, the vast amount of consumer data (e.g., personal data, purchase behaviour, browsing and search history, social media activity, location or geolocation data, lifestyle data, etc.) they can collect across their platforms (often in real time), and the role that data can play in helping firms to secure and maintain leading positions within their core markets. Such data may be valuable in financial services if it reveals and/or gives additional insight to a consumer’s financial and risk profile. The FCA notes that some types of data are particularly useful in allowing firms to obtain competitive advantages. This could be the case where data is inimitable, rare, valuable and non-substitutable.
One theme emerging from the FCA’s previous Discussion Paper and Feedback Statement is the potential data asymmetry that exists between Big Tech firms and traditional financial services firms. Broadly speaking, this data asymmetry arises because financial services firms are unable to access Big Tech firms’ datasets which currently sit outside existing data-sharing initiatives, whereas financial services data could be accessed by Big Tech firms. More specifically, the FCA highlights the following considerations:
| Sources of data asymmetry | Countervailing considerations |
|---|---|
| • Data sharing initiatives exist in respect of certain aspects of the financial services industry (e.g., Open Banking, Open Finance, data from Credit Reference Agencies), whereas Big Tech firms are not required to share their datasets. • Some Big Tech firms offer products/services (e.g., mobile wallets, parts of their customer journeys) that allow them visibility of transaction data. • Where Big Tech firms partner with traditional financial services firms, they can leverage their strength and bargaining power to dictate the terms of the partnership. • Big Tech firms can leverage their advanced analytics and AI technologies to combine and analyse data from multiple sources. | • While Open Banking provides access to payment account data, it does not provide a holistic view over a consumer’s finances. • Data protection law may limit the ability of Big Tech firms to use data collected and processed for one purpose (e.g., Big Tech firms’ core digital activities) for another purpose (e.g., financial products/services). • Big Tech firms may enter into bilateral arrangements with financial services firms to provide access to the data from their core platform services. • The quality of financial services firms’ data, collected over long-standing relationships they frequently have with their clients, gives them a unique competitive advantage over new entrants. |
The FCA now seeks input on:
- The extent to which such data symmetry actually exists,
- What the nature and drivers of any data symmetry are,
- Whether data symmetry is expected to become more significant over time, and
- Whether any regulatory or other constraints might mitigate or prevent data asymmetry or the adverse impact arising from it.
Competition impact
Building on the thinking developed in the Discussion Paper and Feedback Statement, the FCA highlights a number of competition benefits and harms that may potentially result from the use of data:
| Competition benefits | Competition harms |
|---|---|
| • Development of products that are more tailored to consumers’ needs, given that Big Tech firms’ access to data may allow them to understand individuals’ specific financial needs better, and target individual consumers more effectively. • More accurate pricing of financial products and services, given more accurate understanding of consumers’ financial and risk profile (including affordability, creditworthiness, and risk appetite), which, in turn, leads to lower cost of provision (e.g., lower insurance premiums) and improved financial inclusion. • Ability to design improved and innovative consumer journeys, which may allow consumers to access financial services in a more cost and time-efficient way (e.g., obtaining a credit decision more quickly, removing frictions in process of applying for new financial services/products). | • Data asymmetry may lead to the creation of barriers to entry and entrenched market power (e.g., inability of traditional financial services firms to compete effectively, control of consumer ‘gateways’, etc.), which may lead to poor consumer outcomes in the longer term, including a reduction in the range and quality of products, as well as higher prices. • Ability to price-discriminate between consumers based on different willingness to pay, and/or to ‘cherry pick’ the most profitable segments in a market, with a view to extracting maximum rents/excessive profits, which may impact, in particular, consumers with vulnerable characteristics. • Reduced competitive pressure may lead to reduced incentives to develop improved and innovative financial products and services. |
Respondents to the Discussion Paper have previously proposed some actions that could be considered to harness competition benefits or mitigate potential competition harms, including: facilitating access to Big Tech firms’ data (e.g., by allowing data portability with consumers’ consent, or allowing other firms in financial services to access data through commercial arrangements on fair, reasonable and non-discriminatory terms); or placing limits on the use of Big Tech firms’ datasets from their core digital activities in financial services.
The FCA now seeks more specific input on:
- the value of Big Tech firms’ data sets (including when combined with financial services data);
- other data sources that financial services firms can use to replicate or substitute for Big Tech firms’ data;
- the extent to which competitor financial services firms can access Big Tech data (including applicable contractual terms, etc.);
- whether the competition benefits/harms that FCA has identified are emerging/likely to emerge in the future, as well as any other competition impacts;
- ways regulation can enable competition benefits to materialise while mitigating potential harms.
Other issues
The Call for Input also briefly deals with the scope of the FCA’s inquiry.
On scope, the FCA notes that the Call for Input already covers a broader scope than the Discussion Paper previously did, in that it includes retail financial services sectors beyond payments, deposits, consumer credit and insurance (such as, for example, investment advice). However, the FCA also considering extending its review to wholesale financial markets. Specifically, the FCA seeks input on:
- what competition or data-based competition issues arise in wholesale markets;
- whether these are similar or different to the issues under consideration in retail markets;
- whether the FCA should expand its scope to include wholesale markets.
Finally, given the pace of change in digital markets and the fact that these markets continue to evolve, the FCA is seeking input on:
- other significant factors which may contribute to Big Tech firms gaining market power and/or becoming ‘gatekeepers’ in financial services; and
- how partnerships between Big Tech firms and financial services firms have evolved, the potential benefits they bring, and any potential competition concerns.
Responses to the Call for Input should be submitted by 22 January 2024. The FCA intends to publish its findings and proposed next steps in the second quarter of 2024.
[1] “Big Tech” is defined in the Discussion Paper as “large digital companies with established technology platforms and extensive established customer networks” (see Discussion Paper, paragraph 1.2), and the FCA has considered the activities of companies such a Google, Apple, Facebook and Amazon.