Back in 2020, the French Competition Authority (“FCA”) had announced, in its annual priorities, its interest in the competition implications of the digital revolution in the financial sector, notably in the context of the growth of FinTech, the introduction of blockchain technology and the emergence of “digital giants” in payment services. Shortly after this announcement, on 13 January 2020, the FCA started an ex officio investigation to assess the competitive situation in the sector of new technologies applied to financial activities and, more specifically, to payment activities.
More than a year later, in a public opinion of over 120 pages, the French Competition Authority (“FCA”) provides its initial conclusions (i) noting the emergence of new services, initiation channels and alternative payment methods, (ii) reporting on a new market dynamic with the arrival of new players and the impact on traditional banking groups and (iii) addressing some of the competition issues facing the sector.
The emergence of multiple new services, initiation channels and alternative payment methods
Today, the payment sector is revolutionized by two new technologies: cloud services and blockchain, which, although not specific to this sector, are likely to, in the FCA’s view, profoundly modify its functioning in the long term.
- Cloud services include outsourcing solutions for data storage which are becoming a must-have for many financial players, both new entrants (e.g., Apple Pay) and traditional players (BNP Paribas), due to their flexibility and performance benefits;
- As to blockchain, the FCA views the application of this technology as particularly promising as it should (i) promote the development of innovative services, (ii) improve both the / execution of transactions in crypto-assets and the security of payments in general, (iii) reduce the cost of payment services and (iv) accelerate cross-border transactions.
A new market dynamic: the new players and the reaction of the traditional banking groups
In the payment sector, two new players are emerging, FinTechs and BigTechs:
- FinTechs bring together a myriad of entities with varied profiles and economic models. The FCA observes that the main common denominator of these players is that they have developed “niche” business segments that rely on new technologies, especially the smartphone.
- BigTechs refers to the major digital players such as Google, Apple, Alibaba, Xiaomi, who enter the financial sector. The FCA notes that while these players have varied business models and entry strategies, data acquisition and exploitation is key in their business model.
As for the traditional banking players, they are seeking to adapt by investing directly in FinTechs in order to internalize certain innovations and to create synergies or to conquer new markets (e.g. Société Générale controlling the Fintechs Boursorama, Treezor and Prisméa). In addition, these traditional players also enter into cooperation and partnership agreements, especially with the new non-banking players. The FCA notes that one of the major developments in the payments sector in recent years has been the emergence of agreements between banking groups and BigTech (e.g. the agreements between Apple and the six largest French banking groups to offer Apple Pay to the traditional banking customers). Finally, by investing in research and development, a number of banking groups are creating incubators, bringing start-ups into the payments industry in order to accelerate digital transition and attract new customers.
The competitive analysis and the FCA’s concerns
The FCA starts with a traditional market definition analysis: are the services provided by new entrants compared to those provided by traditional banking players substitutable or complementary. It observes that the payments sector is a two-sided market and characterized by a strong dynamism. For the moment, it would appear that the services introduced by the new players is complementary to those of the traditional players but the FCA notes that this link can quickly change, in particular by integrating these services into the offerings of banks or, conversely, by FinTechs developing their own complete banking offers. Consequently, the FCA concludes that the market dynamism makes the exercise of defining the relevant markets more complex, especially in the context of the prospective analysis in merger control.
The FCA also highlights the existing regulatory and economic barriers to entry and expansion in the payment sector which explains why innovating FinTechs are using new technologies and innovation to enter the market.
In addition to the barriers mentioned above, the FCA identifies two other barriers to entry, (i) access to certain technological infrastructure, particularly the NFC smartphone antenna and (ii) access to data which allow certain FinTech to offer their payment services in the context of the application of the PSD2.
On the first barrier to entry (i), the FCA observes that the effective access (opening or closure) to the NFC antenna on smartphones has a real impact on the ability of the players who have developed contactless mobile payment solutions based on NFC technology to offer their services on devices equipped with these antennas. On the latter barrier to entry (ii) it is noticed that various APIs developed by the account-servicing payment service providers (“ASPSPs”), including the banks in particular, are still not fully operational in France.
These are further barriers that have led the authority to issue points of vigilance. Among these risks, have been identified:
- competitive risks associated with the use of blockchain; or
- the risk of calling into question the universal banking model and marginalization of traditional banking players;
- the risk of hindering the development of payment initiation service providers and account information service providers.
With regard to the latter risk, the FCA observes that the evolutions in the payment sector could lead to a profound change in its functioning. For instance, depositing and cashing checks and cash could be called into question. In addition, the FCA raises the risk for traditional banking players of being confined in the long term to execution tasks with significant fixed cost, while being marginalized in the distribution chain value. On the contrary, BigTechs could control certain innovative technologies, which may play, in the future, a decisive role in the service chain.