OPINION
2022 Apr/05
Competition Policy for Big Techs and their Entry into Financial Services
Apr. 05, 2022
PDF
Cho, Sung Hoon
- Summary
- As big techs, large technology companies that have established and operated digital platforms, are actively expanding into financial services, competition issues regarding them have come to the fore in the financial services industry. The source of big techs’ competitive advantage rests on data collected from direct interactions among users and network effects of platforms. Considering these features, some have raised concerns that the current competition policy is ineffective for big techs. Under the circumstances, the US and the EU have introduced the ex-ante, entity-based regulatory framework to designate platform operators subject to regulation and define the do’s and don’ts for them. Another pillar of the new regulatory system is the prevention of data monopolies by large platform operators like big techs.
If Korea wants to formulate and implement an effective competition regulatory framework for big techs’ entry into financial services, the following should be fully taken into consideration. First, a close cooperative relationship should be established between financial and competition regulators and a clear demarcation should be fixed for regulatory responsibilities. Second, careful consideration is required for data governance issues. Lastly, a balanced approach is needed to forestall competition policies from undermining financial innovation.
Traditionally, financial consumer protection, business conduct, and financial soundness and stability have represented key regulatory concerns in the financial sector, while fair competition or antitrust has rarely been considered a critical issue. Aside from a few financial infrastructure services characterized as monopolistic essential facilities including the financial payment network, or depositing, settlement and payment systems of the capital markets, front office services for directly dealing with consumers or corporate clients have been recognized as a highly competitive area where financial consumer protection and financial stability take priority over anti-trust policy. However, as giant digital platforms, the so-called big tech firms, are actively entering the financial sector around the globe and increasing their presence in the market, fair competition issues with respect to big techs have come to the fore. Although they expand into finance with the focus on front office services such as payment, concerns have been raised about the possibility that big techs would establish excessive market power based on their network and data-based competitive edge. Under the circumstances, competition authorities in major economies such as the US and the EU are currently formulating competition policies to forestall market dominance by big techs. The financial services industry also actively engages in discussions about how to regulate big tech firms in terms of competition.
Under the context, this article intends to explore big techs’ characteristics, fair competition issues resulting from their activities, and how competition authorities of major economies currently respond to such issues. In addition, a few considerations would be presented for effective policy responses to competition concerns arising from the entry of big techs into financial services.
Significance and characteristics of big techs
According to a great deal of research literature on big techs,1) the term big tech can be defined as a ‘large technology company owning and operating a digital platform’. Big techs acting as the ‘gatekeeper’ who ‘hold and operate platforms’ control and manage the participation of business users and consumers in their platforms. Notably, big techs have been established to engage in their non-finance main business,2) rather than to provide financial services and have entered the financial services industry by using the data and network from their existing business lines, which distinguishes them from fintech firms. The companies commonly described as big techs by the literature mentioned above include the US’ Google, Apple, Amazon, and Facebook and China’s Alibaba and Tencent. In Korea, Kakao and Naver are usually regarded as the closest to big techs.3)
The competitive edge of big techs stems from interactions among platform participants and data generated as a by-product of these interactions. A larger platform (a larger number of users) sharply boosts such interactions, thereby generating more data. Big techs can provide products and services precisely tailored to the needs of platform participants through analysis of the data. In this way, greater user activity is generated and in turn, it produces yet more data, resulting in the so-called ‘Data Network Activities (DNA) loop’ (Shin, 2019; Carstens et al., 2021). Furthermore, cross-side network effects arising from the platform serving as a two-sided market contribute to amplifying economic effects in the volume and scope through this DNA loop.
Meanwhile, big tech firms can substantially curtail miss-match cases between consumers and suppliers through sophisticated analysis of massive data, thereby gradually eliminating the niche market into which the newcomers can advance. Amid the growing presence of intangible assets in the digital technology industry, some new entrants may face severe financial constraints in terms of intangible asset investment.4)
Fair competition issues regarding big techs and major economies’ policy response
Anti-competition or unfair practices regarding big techs operating digital platforms can take place on the following three fronts. First, a big tech’s unfair practices could adversely affect consumers on one side of the platform, which could give rise to consumer damage issues. Second, unfair practices could emerge between business users on the other side of the platform and a big tech as the platform gatekeeper. Big tech firms serve as both an administrator of platforms on which business users have to rely and the gatekeeper exerting control over platforms. In some cases, they compete with business users in the same business area, which raises competition concerns of utmost importance in that it translates into power dynamics between parties involved in platforms like the open market for online shopping. Third, there is a possibility that a big tech could push its rival out of the market—whether it be another platform service provider or a firm engaging in a different area—by utilizing competitive advantages like the DNA loop and then, expand market power in the losing parties’ business area.
The Federal Trade Commission (FTC) Chair Lina Khan argued that predatory pricing5) and vertical integration6) represent a primary source of the growth of Amazon, a major big tech firm. She also asserted that under the current ex-post regulatory regime centering on consumer welfare and price, it is difficult to define markets for digital platform service providers like Amazon and equally challenging is to discern whether a business practice is of the anticompetitive nature. As the ex-post regulation takes a long time horizon from the occurrence of any unfair practice to punishment, it may be impossible to restore original market conditions once a big tech establishes significant market power.7)
The policy approach that the US and the EU have adopted to improve regulatory effectiveness regarding competition concerns about big techs can be classified into two directions as follows. First, as stated above, they have introduced the ex-ante entity-based regulatory regime as a response to limited effects of the previous ex-post regulation. Under the new regime, platform operators subject to regulation are predetermined by platform size and then relevant authorities prescribe obligations and prohibited activities for them. In June 2021, the US House of Representatives Judiciary Committee approved a package of five bills aimed at regulating platform operators,8) under which the Federal Trade Commission and the Department of Justice would jointly designate as the covered platform online platform businesses that both serve as critical trading partners and satisfy criteria for the number of monthly active users and business users, net sales, or market capitalization.9) The covered platforms are banned from engaging in discriminatory practices of the self-preferencing nature, business activities triggering conflicts of interest, and collection, use and sharing of consumer information for commercial purposes.10) The European Commission unveiled the Digital Market Act (DMA) in December 2020 which presumes a platform over a certain size to be the gatekeeper and specifies the do’s and don’ts regarding various practices that may affect market contestability.11)
Secondly, competition policy to regulate big techs is geared towards the prevention of data governance. The policy goal is to forbid covered platforms or large platform operators designated as gatekeeper from monopolizing data. Data is a by-product of interactions among platform users. If platform operators exclusively control such data, it could drive up platform switching costs and reinforce their monopoly position. Given this perception, the US and the EU aim to regulate platform operators by ensuring seamless data transfer between platforms. The EU introduced the ‘Revised Directive on Payment Services (PSD2)’ in 2015 and the ‘General Data Protection Regulation (GDPR)’ in 2018 to set guidelines for the data subject’s right to control their own data, under which upon the request of users, the data controller should make relevant data highly accessible to third parties.12) Among the five bills adopted by the US, the Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act aims to prohibit covered platforms from collecting, using and sharing user information for commercial purposes and impose them the obligation to guarantee portability and interoperability of data.
Considerations for an effective policy response to big techs’ entry into financial services industry
In the financial services industry, anti-competition or unfair practices regarding big techs can take place on the three fronts as mentioned above. On the first front, unfair practices and consumer damage issues that involve consumers and big tech firms are more about consumer protection than about fair competition or anti-trust. On the second front, unfair conduct issues could arise from business users and big techs acting as a gatekeeper of platforms. These issues are less important than those regarding an open market platform since the business model where a financial firm sells its product or service on a platform while the platform intermediates a transaction of the product or service has yet to take hold in the market. On the third front, unfair practices and market dominance could result from competition among platform operators or between platform operators and existing financial firms, which is recognized as a key competition issue regarding big techs’ expansion into financial services.
If Korea wants to establish and implement an effective competition regulatory framework specifically targeting big techs’ entry into financial services, instead of the general fair competition policy, the following matters should be fully taken into consideration. First, who should regulate big techs’ financial services should be determined. As with other major economies, Korea’s financial authorities (Financial Services Commission) are responsible for matters pertaining to the financial sector including financial consumer protection, business conduct, and soundness, whereas its competition authorities (Fair Trade Commission) regulate fair competition-related matters. When it comes to financial consumer protection, business conduct and soundness, it would be desirable for the financial authorities to act as a regulator based on the ‘same activity, same regulation’ principle. In terms of fair competition, however, if the ex-ante entity-based approach is taken like the US and the EU to designate platform operators subject to regulation,13) it seems uncertain who should enforce relevant regulations. Furthermore, some competition policies cannot be completely separated from those involving financial consumer protection or soundness.14) This requires establishing a cooperative relationship between financial and competition regulators and fixing a clear demarcation of regulations for big techs.
Second, big techs’ potential for achieving greater market power in the financial sector rests on their capability to offer financial services by utilizing data produced and accumulated from existing business lines. Big techs’ data are differentiated from the data that established financial firms collect from customers, and financial firms’ access to such data is limited. This gives rise to competition concerns that affect not only the financial sector but also the business environment of big techs. Considering that the prevention of data monopolies by big techs constitutes one pillar of the big tech regulation implemented by the US and the EU, Korea should also give full consideration to data governance issues.
Third, with respect to the strategy and method of big techs’ expansion into finance, financial firms rarely serve as the business user of platforms as mentioned above. Notably, the Fair Trade Commission proceeds with the legislation of the Act on Fair Intermediation of Online Platforms that aims to ensure fair transactions between platform operators and business users. In the market for a certain financial product or service, big techs (platform operators) and established financial firms could be directly pitted against each other. In addition, many big techs are likely to advance into the financial sector through partnerships with existing financial firms, which would further complicate competition issues. In Korea, big techs are still positioned as new entrants, instead of as incumbents with market power. In this sense, given that policy initiatives are designed to regulate the potential market dominance by big techs rather than their current market power, a balanced approach is required to forestall the fair competition regulatory framework from entrenching the existing financial structure or undermining financial innovation that could arise from big tech or fintech firms.
1) Bains, P., Sugimoto, N., Wilson, C., 2022, BigTech in financial services: Regulatory approaches and architecture, Fintech note 2022/002, IMF.
Shin, H.S., 2019, Big tech in finance: opportunities and risks, BIS Annual Economic Report.
Boissay, F., Ehlers, T., Gambacorta, L., Shin, H.S., 2021, Big techs in finance: on the new nexus between data privacy and competition, BIS working papes No.970.
Carstens, A., Claessens, S., Restoy, F., Shin, H.S., 2021, Regulating big techs in finance, BIS Bulletin No.45.
Crisanto, J.C., Ehrentraud, J., Lawson, A., Restoy, F., 2021, Big tech regulations: what is going on? FSI insights on policy implementation No.36, BIS.
Son, S.H., 2022, Eight challenges for financial innovation, Korea Institute of Finance.
2) Internet searching, online shopping, and social networking services
3) Google and Facebook have been reorganized and incorporated into their parent companies (holding companies), Alphabet and Meta, respectively. But this article uses Google and Facebook as they are more familiar names.
4) Park, Y.R., 2018, The rise of intangible assets and the role of capital markets, Capital Market Focus of Korea Capital Market Institute 2018-20.
5) Since the platform size matters, Amazon pursues growth over imminent profits in its early stage through predatory pricing. After rivals are forced out of the market, it could maintain its low price strategy as profits generated from other business lines could make up for the loss.
6) A range of business lines is integrated into Amazon’s own platform.
7) Khan, L., 2017, Amazon’s antitrust paradox, Yale Law Journal 126, 710-805.
8) American Choice and Innovation Online Act
Ending Platform Monopolies Act
Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act
Platform Competition and Opportunity Act
Merger Filing Fee Modernization Act
9) A critical trading partner refers to a gatekeeper with the capability of controlling participation in platforms.
10) Yang, Y.H. & Lee, H.R., 2021, Introduction of antitrust laws for platforms in the US and its implications, KDI Focus 109, 1-8.
Jang, H.M., 2021, Global trend of tightened regulation for platform operators, Capital Market Focus of Korea Capital Market Institute 2021-22.
11) The DMA will ensure disintermediation by bypassing a gatekeeper and prohibit a gatekeeper from engaging in non-discriminating treatment of business users and from treating services and products offered by the vertically-integrated gatekeeper itself more favorably.
Choi, K.Y., 2021, Analysis of key issues in the Digital Market Act (DMA), KISI Premium Report 21-20.
Hong, J.Y., 2021, Strengthened regulation for global big techs, Issue Paper of Korea Capital Market Institute 2021-20.
12) Kwon, M.K., 2019, Current state of MyData introduction in Korea and abroad and its implications, Issue Paper of Korea Capital Market Institute 19-02.
13) The Act on Fair Intermediation of Online Platforms, of which legislation has been announced by the Fair Trade Commission, takes an ex-ante regulatory approach by specifying requirements for platform operators subject to the Act.
14) For instance, the excessive market power of big techs could give rise to the ‘too-big-to-fail’ problem, potentially threatening financial stability.
Under the context, this article intends to explore big techs’ characteristics, fair competition issues resulting from their activities, and how competition authorities of major economies currently respond to such issues. In addition, a few considerations would be presented for effective policy responses to competition concerns arising from the entry of big techs into financial services.
Significance and characteristics of big techs
According to a great deal of research literature on big techs,1) the term big tech can be defined as a ‘large technology company owning and operating a digital platform’. Big techs acting as the ‘gatekeeper’ who ‘hold and operate platforms’ control and manage the participation of business users and consumers in their platforms. Notably, big techs have been established to engage in their non-finance main business,2) rather than to provide financial services and have entered the financial services industry by using the data and network from their existing business lines, which distinguishes them from fintech firms. The companies commonly described as big techs by the literature mentioned above include the US’ Google, Apple, Amazon, and Facebook and China’s Alibaba and Tencent. In Korea, Kakao and Naver are usually regarded as the closest to big techs.3)
The competitive edge of big techs stems from interactions among platform participants and data generated as a by-product of these interactions. A larger platform (a larger number of users) sharply boosts such interactions, thereby generating more data. Big techs can provide products and services precisely tailored to the needs of platform participants through analysis of the data. In this way, greater user activity is generated and in turn, it produces yet more data, resulting in the so-called ‘Data Network Activities (DNA) loop’ (Shin, 2019; Carstens et al., 2021). Furthermore, cross-side network effects arising from the platform serving as a two-sided market contribute to amplifying economic effects in the volume and scope through this DNA loop.
Meanwhile, big tech firms can substantially curtail miss-match cases between consumers and suppliers through sophisticated analysis of massive data, thereby gradually eliminating the niche market into which the newcomers can advance. Amid the growing presence of intangible assets in the digital technology industry, some new entrants may face severe financial constraints in terms of intangible asset investment.4)
Fair competition issues regarding big techs and major economies’ policy response
Anti-competition or unfair practices regarding big techs operating digital platforms can take place on the following three fronts. First, a big tech’s unfair practices could adversely affect consumers on one side of the platform, which could give rise to consumer damage issues. Second, unfair practices could emerge between business users on the other side of the platform and a big tech as the platform gatekeeper. Big tech firms serve as both an administrator of platforms on which business users have to rely and the gatekeeper exerting control over platforms. In some cases, they compete with business users in the same business area, which raises competition concerns of utmost importance in that it translates into power dynamics between parties involved in platforms like the open market for online shopping. Third, there is a possibility that a big tech could push its rival out of the market—whether it be another platform service provider or a firm engaging in a different area—by utilizing competitive advantages like the DNA loop and then, expand market power in the losing parties’ business area.
The Federal Trade Commission (FTC) Chair Lina Khan argued that predatory pricing5) and vertical integration6) represent a primary source of the growth of Amazon, a major big tech firm. She also asserted that under the current ex-post regulatory regime centering on consumer welfare and price, it is difficult to define markets for digital platform service providers like Amazon and equally challenging is to discern whether a business practice is of the anticompetitive nature. As the ex-post regulation takes a long time horizon from the occurrence of any unfair practice to punishment, it may be impossible to restore original market conditions once a big tech establishes significant market power.7)
The policy approach that the US and the EU have adopted to improve regulatory effectiveness regarding competition concerns about big techs can be classified into two directions as follows. First, as stated above, they have introduced the ex-ante entity-based regulatory regime as a response to limited effects of the previous ex-post regulation. Under the new regime, platform operators subject to regulation are predetermined by platform size and then relevant authorities prescribe obligations and prohibited activities for them. In June 2021, the US House of Representatives Judiciary Committee approved a package of five bills aimed at regulating platform operators,8) under which the Federal Trade Commission and the Department of Justice would jointly designate as the covered platform online platform businesses that both serve as critical trading partners and satisfy criteria for the number of monthly active users and business users, net sales, or market capitalization.9) The covered platforms are banned from engaging in discriminatory practices of the self-preferencing nature, business activities triggering conflicts of interest, and collection, use and sharing of consumer information for commercial purposes.10) The European Commission unveiled the Digital Market Act (DMA) in December 2020 which presumes a platform over a certain size to be the gatekeeper and specifies the do’s and don’ts regarding various practices that may affect market contestability.11)
Secondly, competition policy to regulate big techs is geared towards the prevention of data governance. The policy goal is to forbid covered platforms or large platform operators designated as gatekeeper from monopolizing data. Data is a by-product of interactions among platform users. If platform operators exclusively control such data, it could drive up platform switching costs and reinforce their monopoly position. Given this perception, the US and the EU aim to regulate platform operators by ensuring seamless data transfer between platforms. The EU introduced the ‘Revised Directive on Payment Services (PSD2)’ in 2015 and the ‘General Data Protection Regulation (GDPR)’ in 2018 to set guidelines for the data subject’s right to control their own data, under which upon the request of users, the data controller should make relevant data highly accessible to third parties.12) Among the five bills adopted by the US, the Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act aims to prohibit covered platforms from collecting, using and sharing user information for commercial purposes and impose them the obligation to guarantee portability and interoperability of data.
Considerations for an effective policy response to big techs’ entry into financial services industry
In the financial services industry, anti-competition or unfair practices regarding big techs can take place on the three fronts as mentioned above. On the first front, unfair practices and consumer damage issues that involve consumers and big tech firms are more about consumer protection than about fair competition or anti-trust. On the second front, unfair conduct issues could arise from business users and big techs acting as a gatekeeper of platforms. These issues are less important than those regarding an open market platform since the business model where a financial firm sells its product or service on a platform while the platform intermediates a transaction of the product or service has yet to take hold in the market. On the third front, unfair practices and market dominance could result from competition among platform operators or between platform operators and existing financial firms, which is recognized as a key competition issue regarding big techs’ expansion into financial services.
If Korea wants to establish and implement an effective competition regulatory framework specifically targeting big techs’ entry into financial services, instead of the general fair competition policy, the following matters should be fully taken into consideration. First, who should regulate big techs’ financial services should be determined. As with other major economies, Korea’s financial authorities (Financial Services Commission) are responsible for matters pertaining to the financial sector including financial consumer protection, business conduct, and soundness, whereas its competition authorities (Fair Trade Commission) regulate fair competition-related matters. When it comes to financial consumer protection, business conduct and soundness, it would be desirable for the financial authorities to act as a regulator based on the ‘same activity, same regulation’ principle. In terms of fair competition, however, if the ex-ante entity-based approach is taken like the US and the EU to designate platform operators subject to regulation,13) it seems uncertain who should enforce relevant regulations. Furthermore, some competition policies cannot be completely separated from those involving financial consumer protection or soundness.14) This requires establishing a cooperative relationship between financial and competition regulators and fixing a clear demarcation of regulations for big techs.
Second, big techs’ potential for achieving greater market power in the financial sector rests on their capability to offer financial services by utilizing data produced and accumulated from existing business lines. Big techs’ data are differentiated from the data that established financial firms collect from customers, and financial firms’ access to such data is limited. This gives rise to competition concerns that affect not only the financial sector but also the business environment of big techs. Considering that the prevention of data monopolies by big techs constitutes one pillar of the big tech regulation implemented by the US and the EU, Korea should also give full consideration to data governance issues.
Third, with respect to the strategy and method of big techs’ expansion into finance, financial firms rarely serve as the business user of platforms as mentioned above. Notably, the Fair Trade Commission proceeds with the legislation of the Act on Fair Intermediation of Online Platforms that aims to ensure fair transactions between platform operators and business users. In the market for a certain financial product or service, big techs (platform operators) and established financial firms could be directly pitted against each other. In addition, many big techs are likely to advance into the financial sector through partnerships with existing financial firms, which would further complicate competition issues. In Korea, big techs are still positioned as new entrants, instead of as incumbents with market power. In this sense, given that policy initiatives are designed to regulate the potential market dominance by big techs rather than their current market power, a balanced approach is required to forestall the fair competition regulatory framework from entrenching the existing financial structure or undermining financial innovation that could arise from big tech or fintech firms.
1) Bains, P., Sugimoto, N., Wilson, C., 2022, BigTech in financial services: Regulatory approaches and architecture, Fintech note 2022/002, IMF.
Shin, H.S., 2019, Big tech in finance: opportunities and risks, BIS Annual Economic Report.
Boissay, F., Ehlers, T., Gambacorta, L., Shin, H.S., 2021, Big techs in finance: on the new nexus between data privacy and competition, BIS working papes No.970.
Carstens, A., Claessens, S., Restoy, F., Shin, H.S., 2021, Regulating big techs in finance, BIS Bulletin No.45.
Crisanto, J.C., Ehrentraud, J., Lawson, A., Restoy, F., 2021, Big tech regulations: what is going on? FSI insights on policy implementation No.36, BIS.
Son, S.H., 2022, Eight challenges for financial innovation, Korea Institute of Finance.
2) Internet searching, online shopping, and social networking services
3) Google and Facebook have been reorganized and incorporated into their parent companies (holding companies), Alphabet and Meta, respectively. But this article uses Google and Facebook as they are more familiar names.
4) Park, Y.R., 2018, The rise of intangible assets and the role of capital markets, Capital Market Focus of Korea Capital Market Institute 2018-20.
5) Since the platform size matters, Amazon pursues growth over imminent profits in its early stage through predatory pricing. After rivals are forced out of the market, it could maintain its low price strategy as profits generated from other business lines could make up for the loss.
6) A range of business lines is integrated into Amazon’s own platform.
7) Khan, L., 2017, Amazon’s antitrust paradox, Yale Law Journal 126, 710-805.
8) American Choice and Innovation Online Act
Ending Platform Monopolies Act
Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act
Platform Competition and Opportunity Act
Merger Filing Fee Modernization Act
9) A critical trading partner refers to a gatekeeper with the capability of controlling participation in platforms.
10) Yang, Y.H. & Lee, H.R., 2021, Introduction of antitrust laws for platforms in the US and its implications, KDI Focus 109, 1-8.
Jang, H.M., 2021, Global trend of tightened regulation for platform operators, Capital Market Focus of Korea Capital Market Institute 2021-22.
11) The DMA will ensure disintermediation by bypassing a gatekeeper and prohibit a gatekeeper from engaging in non-discriminating treatment of business users and from treating services and products offered by the vertically-integrated gatekeeper itself more favorably.
Choi, K.Y., 2021, Analysis of key issues in the Digital Market Act (DMA), KISI Premium Report 21-20.
Hong, J.Y., 2021, Strengthened regulation for global big techs, Issue Paper of Korea Capital Market Institute 2021-20.
12) Kwon, M.K., 2019, Current state of MyData introduction in Korea and abroad and its implications, Issue Paper of Korea Capital Market Institute 19-02.
13) The Act on Fair Intermediation of Online Platforms, of which legislation has been announced by the Fair Trade Commission, takes an ex-ante regulatory approach by specifying requirements for platform operators subject to the Act.
14) For instance, the excessive market power of big techs could give rise to the ‘too-big-to-fail’ problem, potentially threatening financial stability.