Nowadays, digital payments are seeing a wider and wider range of adoption. It seems that the finance industry is also inextricably tied to the technology industry. This bond makes it easier for anyone to transact money, and the possibilities of what we can do with digital payments are much wider than what is possible with cash. Nevertheless, there are some concerns about who provides these payments.
The Financial Conduct Authority (FCA) aims to start a discussion about the incursion of Big Tech companies into the financial services space. Being one of the most respected regulatory bodies in the world, it oversees the totality of the UK financial companies – from banks, through, fintech companies and forex brokers.
The goal of its proposed debate is not to introduce any regulation for the time being, but gather information on the possible impact of these companies providing their services. To kickstart this conversation, the FCA published a paper on the matter. There will also be a series of sector specific workshops in December 2022, and feedback on the paper is expected until January 15 2023.
The possible impacts of these huge conglomerates starting to provide the services the FCA examines are quite huge. In its research, it has focused on four different aspects – Big Tech’s provision of payment methods, deposits, consumer credit and insurance. In the article below, we will summarize what the UK market watchdog had to say about the possible ramifications of the first aspect for the end consumer:
Who is Big Tech?
The paper defines a Big Tech company as a large digital company with an already existing vast user base, customer networks and proprietary technology platforms. The main focus of the FCA in it is the four major Big Tech players in the UK – these are Amazon, Google, Apple and Meta. The companies have already started offering some financial services, and all four of them are already authorized by the FCA in some capacities. For instance, all four of them have licenses to offer payment services, while Google and Meta are authorized to deal with e-money as well.
As said, we will focus only on payments within this article. And it is undeniable that these Big Tech firms are already present on them. A 2020 survey, conducted by the FCA, revealed that at least 27% of respondents had used a mobile payment app. These apps are quite varied, and there is hardly any business there that does not accept them – however, of note were two in particular. These were Google and Apple Pay. The two apps are very well positioned on the market, given that modern smartphones have either Android or IOS as their operating system.
The FCA calls this an “effective duopoly”. And even though these are not the only digital payment methods in the UK, their rise in adoption is undeniable. All sorts of payments can be made using them nowadays, and they are quick and convenient. Currently, payments processing companies exist in a very competitive market, and the consumer has a lot of possibilities to pick from. That could easily change, with Big Tech being able to increase their market share tremendously. The FCA examines three scenarios in which that could happen, as well as the pros and cons of these firms’ increased market presence.
Big Tech and innovation in payments
The first scenario that is outlined is Big Tech companies providing easier payment methods. This seems like a good scenario for everyone – the companies could make it faster, or more convenient for merchants to process your payments via various technological advancements. The merchant enjoys lower operating costs. One such recent advancement is the ability to pay using a smartphone instead of a card – this is called Tap to Pay, and is already available for IOS phones.
In this scenario, however, there is a chance of the companies being able to achieve such mainstream adoption of their services, that merchants start only taking their payment methods. For instance, if they only accept ApplePay and you are using an Android device, you would be gate kept from being able to actually shop there.
Can Big Tech compete with credit cards?
The second way in the FCA describes Big Tech venturing into the payments sector is by directly trying to compete with credit card providers. This scenario might seem rather far-fetched. Another UK survey revealed that card transactions amounted for more than 50% of the total amount of payments in 2021. Furthermore, these payments are also primarily done via MasterCard and Visa, which accounted for 99% of them.
Currently, given the vast domination of the two card giants and how ambiguous using their products has become, it is even somewhat unthinkable to consider such an outcome. However, Big Tech can develop its own technology to the point where it does not need to actually compete with them. That can be done via e-wallets. These are already very popular in the UK – PayPal, Skrill and Neteller, but ApplePay and GooglePay, their Big Tech competitors could be more convenient to the client. That is because these wallets are integrated within their phones and do not require any additional steps to use – in fact, they come pre-installed on the newer distributions of the two mobile operating systems.
Beyond retail payments
Finally, the FCA examines the possibility of Big Tech moving beyond just offering retail payments and expanding the scope of its services. The companies could start offering payment services more traditionally associated with other kinds of firms. For instance, they could introduce a way to exchange currency. This has a potential impact for the UK Forex industry – most of the biggest brokers already a part of it accept these payment methods, but by serving as exchanges, who is to say it is not possible for Apple and Google to seek to become Forex CFD providers as well, directly competing with them! Another possible incursion is the introduction of peer-to-peer transfers, between user devices. This would make it easier to transfer money without dealing with any mobile banking app.
What are the possible pros and cons of these scenarios?
Without a doubt, there is no guarantee that these three possible cases will actually happen. They would be bound to come with incredible implementation costs for Big Tech and who is to say that the four giants would agree to them. However, should any of them take place, the FCA has outlined the various advantages and disadvantages to the clients of such firms:
Perhaps the most obvious downside of these possible expansions of Big Tech into the payments industry would be the mentioned potential for gatekeeping of various sectors of the industry. This could come from the companies consolidating so much of the markets, and achieving such high usage rates of their products that they are able to monopolize. Such a state would obviously be quite bad for anyone – the clients could face higher costs, and the firms could stagnate and stop innovating. However, there could be even worse ramifications – there is the ability for these companies to exclude other market participants or to crush competition.
In fact, the UK’s CMA has already launched an investigation into the Google Play Store. Apps on it are required to use the payment services of Google, instead of allowing the client to pick what to utilize. This is an obviously unfair policy on the part of the Big Tech giant. At the same time, not all is doom and gloom, according to the FCA. It mentions several positive aspects of the expansion of such services from Google and Apple.
For instance, the competition between the two Big Tech firms themselves could easily lead to both of them striving to innovate and drive prices down for the client, to attract them to their side. It could also drive the adoption of novel interbank settlement methods as well. The higher level of convenience and security that can come from these companies’ payment solutions cannot be understated – the ability to actually use them via your phone, which is protected by a fingerprint lock, is a clear example of that, for instance. One thing is for certain – Big Tech is inevitably going to expand the services they offer in some regard, and whether that is for good or bad, remains to be seen!
