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Potential competition impacts of Big Tech entry in retail financial services — a consultation response

One of the nice features of the UK’s political landscape is the openness of regulatory and competition authorities to academic input. Recently, the Financial Conduct Authority (FCA) published a discussion paper titled: “The potential competition impacts of Big Tech entry and expansion in retail financial services“. In parallel, they organized a Webinar introducing the topic as well as several roundtables, where interested parties (big tech, start-ups, academics, consultants, other policy makers) could raise their voices. They also opened a consultation and asked for written comments.

This consultation is academically interesting because (i) retail finance, covering markets for deposits, payments, insurance, and consumer lending, is economically relevant for many banks, financial intermediaries, and very many consumers. (ii) Big tech firms have started to venture into this highly regulated sector, e.g. by offering Apple Pay and Google Pay, but might plan a more massive market entry. Whoever understands the theory of connected markets may know, why. Hence, getting the pros and cons of such potential market entries right is important for respective regulators, in this case the FCA.

Together with my CCP and UEA School of Economics-colleague Andrea Calef, who knows much more about finance than I do, we tried to contribute our perspective in a response submitted to the FCA. In a nutshell, we identify as the key question for the FCA, whether each of the markets is “data driven”, or not. Being “data driven” implies that a market is subject to data-driven indirect network effects and, hence, very likely to tip in the future. If so, this would negatively impact the innovation incentives of both dominant and smaller firms (and potential entrants) and consequently be very bad for consumers.

In the past, we developed a test for data-drivenness of a market (some details here and here), which would also serve the FCA well to answer this crucial question. It suggests that, if a market is found to be data driven, the regulator should intervene. If it is not data driven, let unhampered competition have its way!

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