Mindful of the significant changes that have impacted payment activities in recent years, the French Competition Authority, which had taken up the case of its own initiative in January 2020, has issued its opinion on the competitive situation in the sector of new technologies applied to financial activities. In it, it points to several anticompetitive risks, including one that the Commission recently announced it was investigating following a complaint from streaming music provider Spotify against Apple regarding the mandatory use of the integrated purchase service Apple Pay for the distribution of paid digital content.
Developments in the payments sector
Over the past few years, following technological innovations and the adoption of the Payment Services Directives, in particular the second Directive No 2015/2366 of 25 November 2015 (aka PSD2), the payments sector has been marked by a significant change in supply that has led to a new market dynamic and resulted in the entry of non-banking operators – FinTechs – which include a large number of entities with varied profiles and business models, ranging from start-ups to established players from other business sectors with an already established customer base – such as Orange or Carrefour – to the major digital players, known as BigTechs, i.e. GAFAMs (Google, Amazon, Facebook, Apple and Microsoft) in Europe and the USA and BATXs (Baidu, Alibaba, Tencent and Xiaomi) in Asia.
As online payments have become more widespread, new payment channels have emerged – such as contactless or smartphone payments – as well as alternative payment methods recognized by the Banque de France, “Bitcoin” or “Stablecoins” – a new generation of crypto-currency – that some players want to develop with a view to issuing a “stablecoin” indexed to the dollar.
These new payment services have been made possible by the use of two new technologies: “cloud computing“, which refers to all remotely operated IT solutions and services for data storage, calculation and management, concentrated in the hands of a small number of very powerful providers – including Amazon, Microsoft and Google – and “blockchain”, which is a way of recording continuously produced data, in the form of blocks linked to each other in the chronological order of their validation, in which each of the blocks and their sequence are protected against any modification and which was originally developed to enable crypto-asset transactions.
Faced with these developments, traditional banks are also contributing to innovation by implementing strategies to adapt to the digitization of payment services. Banks are either investing directly in FinTechs, through equity investments, in order to internalize certain functions offered by the latter, create synergies or conquer new markets, or they are concluding cooperation or partnership agreements with FinTechs, and in particular BigTechs, in order to be able to offer them Apple Pay, Google Pay or Samsung Pay services – which enable smartphone owners to make remote and contactless payments. Some are also investing intensively in research and development in order to improve their services.
Competitive situation in the payments sector
The Competition Authority first points out that the definition of relevant markets is likely to be particularly challenging, especially in the context of prospective merger analyses given the two-sided nature of certain markets, such as the bankcard payment market, and the dynamism of the sector, which is reflected in the proliferation of innovative services integrated or combined with pre-existing services, thus making it difficult to identify what services are offered on the market.
The payments sector is also characterized by barriers to entry and expansion of a regulatory and economic nature and related to access to certain facilities and data.
Compliance with regulations, which are prevalent and differentiated according to the services offered – i.e. no less than 11 different approvals depending on the activity in question and the objectives pursued (proper functioning of the financial system, but also the fight against money laundering or the financing of terrorism) generates considerable costs. Paradoxically, some services, such as Apple Pay for example, do not fall under the Monetary and Financial Code.
Network effects and economies of experience and scale are the main economic barriers to entry, which is why some FinTechs enter the market by using pre-existing distribution networks.
The Competition Authority identifies a third category of barriers to entry linked to the competitive advantages of the various players in the sector: i) for banks, their long-established position, which gives them, for example unparalleled experience in managing regulatory compliance, a solid reputation for security and data protection, a substantial customer base, and the ability to spread certain costs, ii) for FinTechs, the fact that they bear neither the costs of maintaining interbank infrastructures nor those related to physical branch networks, and that they have expertise in simplifying the “customer journey” that favors the creation of payment solutions adapted to consumers’ expectations and new uses – and iii) for BigTechs, a very large community of users from their core business, which they can rely on to expand into the payment sector – as Apple or Amazon have done with Apple Pay or Amazon Pay, for example – and a considerable volume of related data that they can couple with the use of an algorithm, their financial power, their reputation, which can build customer loyalty, and finally, their ecosystem structured around a platform integrating their payment solution enabling them to offer a customer experience that is difficult to replicate by competitors.
Competitive risks identified
The Authority notes four possible risks of harm to competition.
First, there is a risk of strengthening the market power of BigTechs, which, through the data collected from their users in the context of their main activities, but also in the context of payments, could increase the attractiveness of their respective platforms, while at the same time holding an unrivalled competitive advantage that would be difficult for their competitors to replicate in the payments sector. In addition, the Authority is concerned that BigTechs may implement self-preferencing practices or restrict access to the contactless smartphone payment solutions integrated into their platforms, such as Amazon Pay or Apple Pay, etc.
In addition, the holding of payment account data accessible online by traditional banking institutions could present risks of foreclosure of access to customers for new operators in the payments sector, such as payment initiation service providers (PISPs) and account information service providers (AISPs), which are highly dependent on access to such data in order to operate on the market.
The use of the blockchain presents risks of harm to competition, not only in the payments sector, but also on the part of those who have access to the blockchain and its users, which may fall within the rules on anticompetitive agreements as well as those relating to abuse of dominance.
And finally, there is a danger that the universal banking model will be challenged and traditional banking players will be marginalized: while a scenario in which the FinTechs emancipate themselves entirely from the banking system by creating their own infrastructures seems unlikely today, traditional banking operators could be relegated, in the long run, to operational tasks involving significant fixed costs (regulatory charges, physical network, payment infrastructures) while being marginalized in the value distribution chain.