FinTech and electronic payments: between privacy and competition, the French Competition Authority releases findings following its sectoral investigation
After investigating the pharmaceutical industry and e-commerce, the French Competition Authority has recently published the conclusions of its sectoral investigation regarding digital payments, focusing on new players in the sector. At the time when some are predicting the end of cash payments, what are the challenges facing digital payments?
The analysis of a complementary and substitutable market
The payment industry is not only a fast-growing market, but also a fast-moving one. What are the reasons for these major upheavals seen in recent years? First, the evolution of the regulatory framework, especially with the second European Payment Services Directive of 2018, regulating and supervising the activity of new players in the electronic payment services sector (PayPal, Amazon Pay and Monext), but also the emergence of new payment methods (contactless payments, connected objects), new currencies (crypto-currencies, including the famous 'BitCoins'), and the dynamism of new players, historically non-banking players, with the rise of 'FinTech' and 'BigTech'. A terminology that may seem complex, but ultimately refers to players that are already well established in our daily lives: 'FinTech' such as Leetchi, Ulule, Revolut or Lendix, develop innovative financial technologies, while 'BigTech' refers to GAFAM and BATX, American and Chinese web giants.
How have these players joined and even reinvented the banking sector? By identifying and overcoming the significant barriers to entry in this sector, such as fixed costs related to the maintenance of inter-bank infrastructures and to the physical networks of bank branches. While banks benefit from a historical monopoly, ensuring their reputation and trust among customers, technological innovations allow new entrants to bypass these barriers. FinTechs have entered the banking market by relying on traditional banks and offered a complementary service, a simplified customer experience. BigTechs, on the other hand, rely on the power of their "core business" activities and their users' community to promote their financial solutions.
It is within this perspective that the French Competition Authority decided, in January 2020, to assess the competitive situation in the new technologies sector, applied to payment activities. In its notice issued at the end of April 2021, the Authority made several observations regarding the analysis of the forces involved and the related competitive risks.
In a market characterised by a friendly competitive balance - what are the points of vigilance?
The Authority believes the development of new technologies will fundamentally change the current dynamism of the market. The points of vigilance identified by the Authority not only concern the market players but also all stakeholders, including private individuals.
BigTech are in particular expected to have a structural impact on the banking market. Such an upheaval would grant them larger market shares, thus strengthening their power to control the evolution of banking. There would be a shift in customers from their core business to their banking business. Such a phenomenon would guarantee a prime position in the market for BigTech, who would have access to information about their users that banks would not dare to dream of. Having access to users' data, including about their financial health and service preferences, will be at the heart of the industry's challenges. In a sector where profitability is strongly linked to the volume of transactions, data generated by users of services - both financial and non-financial - is of obvious interest to understand users’ behavior and thereby adapt financial service offers.
Data access is a hot subject in many sectors and the associated competition issues are neither new nor specific to the payments sector, as shown by the numerous decisions issued by the French Competition Authority and the European Commission. Indeed, as early as 2010, the French Minister of the Economy brought the matter before the Authority regarding advertising on online search engines, which concluded that Google had a dominant position but was not abusive. In 2018, it was the Authority itself that addressed data exploitation on the first advertising channel, the Internet, and considered that the market was dominated by two major operators, Google and Facebook, this time likely to affect competition. Meanwhile, the Commission has committed to ensure that the European level of requirements and security of users' data are met when international operators wish to access such data. The adoption of an adequacy decision with Japan in 2019, giving rise to the largest secure data flow area in the world, and more recently with the United Kingdom, are examples of this. So should all market players be granted access, or should that access be controlled? The equation is not always obvious, as the smoothness of certain services and customer experience relies heavily on this data, where monetization is not necessarily clear or understood to this day.
Other point of vigilance: the evolution of banking fees. According to the Authority, traditional banking players could see their market shares and activities marginalized: even if FinTech cannot entirely free themselves from traditional banks, the evolution of the market could considerably affect their role by reducing them to low-automation tasks with high fixed costs - e.g. cheque and cash deposit and collection. Such a change is not beneficial to the consumer: if banks' role were limited to low value-added operations, they would no longer be able to provide these services free of charge, resulting in higher bank fees.
A detailed but perhaps incomplete analysis
In its analysis, however, the Authority does not carry out an in-depth analysis of another current topic, the "killer acquisitions", highly active in the FinTech sector, and regularly mentioned by the American and British regulators. What are these? It is the purchase of a start-up by an historical operator to - among other things - prevent the threat that the latter could represent if it were to evolve towards a future replacement of its "core business" activity. If BigTech or traditional banks have funding to develop their own technology, they may encourage this mechanism to “move faster”. These transactions have a strong impact on innovation but monitoring them is not always an option as they do not meet the thresholds for notification to the competition authorities, currently based on a company's turnover. Therefore, most of these takeovers escape from any control and this has been the case for several historic takeovers: Facebook/WhatsApp, Facebook/Instagram or Google/DoubleClick.
Some authorities, advocating for a stronger merger control and a more sector-based approach, increased their interventionism, changing their control criteria and notification thresholds, as in Germany and Austria, where authorities now focus on the value of the transaction rather than on turnover. Similarly, the UK has strengthened its controls in recent years and has now a team dedicated to identifying such transactions. Having not identified a negative impact on the market or on innovation, the French Competition Authority considers this to be an isolated phenomenon. Although this situation remains limited, the impact on the market is real, and it will be interesting to see the approach developed by the Authority, especially since a department, dedicated to the digital economy, was inaugurated in 2020.
The need for a national or European approach?
This investigation highlights the current and future risks of the electronic payments sector. While demonstrating the complexity of the question regarding the impact of these new technologies, this study also highlights the Authority's desire to address complex and current matters, which obviously are not specific to the French market.
This study is very timely with the work done by the European Commission which, at the beginning of 2021, addressed issues related to the protection of competition in the digital space and proposed a reform with two proposals for regulations: the Digital Services Act and the Digital Markets Act. The former aims to improve mechanisms for removing illegal content, protect users' fundamental rights and strengthen public oversight of platforms; the latter combats the behavior of platforms in certain digital and related markets, acting as "gatekeepers". While the scope of these regulations is digital space, it includes payment services and could therefore be an additional tool to fight harmful practices in this sector. The pandemic of Covid-19 and the consecutive accelerated and exponential development of new technologies, already makes the need to address these issues as imperative.
With thanks to Intern Marie-June Evin for co-authoring this blog.
 Notice 13-A-24 of December 19, 2013, https://www.autoritedelaconcurrence.fr/fr/avis/relatif-au-fonctionnement-de-la-concurrence-dans-le-secteur-de-la-distribution-du-medicament and Notice 19-A-08 of April 04, 2019, https://www.autoritedelaconcurrence.fr/fr/avis/relatif-aux-secteurs-de-la-distribution-du-medicament-en-ville-et-de-la-biologie-medicale
 Notice 12-A-20 of September 18 2012, https://www.autoritedelaconcurrence.fr/fr/avis/relatif-au-fonctionnement-concurrentiel-du-commerce-electronique
 Notice 21-A-05 of April 29 2021, https://www.autoritedelaconcurrence.fr/fr/avis/portant-sur-le-secteur-des-nouvelles-technologies-appliquees-aux-activites-de-paiement
 Google, Amazon, Facebook, Apple and Microsoft.
 Baidu, Alibaba, Tencent And Xiaomi.
 Notice 10-A-29 of December 14, 2010 https://www.autoritedelaconcurrence.fr/fr/communiques-de-presse/lautorite-de-la-concurrence-estime-que-google-est-en-position-dominante-sur
 Notice 18-A-03 of March 06, 2018, https://www.autoritedelaconcurrence.fr/fr/avis/portant-sur-lexploitation-des-donnees-dans-le-secteur-de-la-publicite-sur-internet
 https://www.picart-law.com/blog/les-start-ups-a-lepreuve-des-killer-acquisitions/#:~:text=Les%20acquisitions%20pr%C3%A9datrices%20 (or%20%C2%AB%20Killer,competition%20r%C3%A9elle%20in%20le%20futur