The Autorité de la concurrence gives its opinion on competition issues related to fintech

As early as 2020, the French Competition Authority (“AFC”) announced, in its annual priorities, its interest in the competitive implications of the digital revolution in the financial sector, particularly in the context of the growth of FinTech, ‘introduction of blockchain technology and the emergence of “digital giants” in payment services. Shortly after this announcement, on January 13, 2020, the FCA launched a ex officio survey to assess the competitive situation in the sector of new technologies applied to financial activities and, more particularly, to payment activities.

Over a year later, in a public opinion of more than 120 pages, the Competition Authority (AFC) presents its first conclusions (i) noting the emergence of new services, initiation channels and alternative payment methods, (ii) reflecting a new dynamic market with the arrival of new players and the impact on traditional banking groups and (iii) the resolution of some of the competition problems facing the sector.

The emergence of multiple new services, initiation channels and alternative payment methods

Today, the payment sector is being revolutionized by two new technologies: cloud services and blockchain, which, although not specific to this sector, are likely, in the opinion of the FCA, to radically modify its long-term functioning.

• Cloud services include data storage outsourcing solutions that are becoming essential for many financial players, whether new entrants (for example Apple Pay) or traditional (BNP Paribas), because of their advantages in terms of flexibility. and performance;
• As for the blockchain, the FCA considers the application of this technology as particularly promising because it should (i) promote the development of innovative services, (ii) improve both the / execution of transactions on crypto-assets and payment security in general, (iii) reduce the cost of payment services and (iv) speed up cross-border transactions.

A new market dynamic: new players and the reaction of 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. FCA observes that the main common denominator of these actors is that they have developed “niche” business segments that rely on new technologies, in particular the smartphone.
• BigTechs refer to the big digital players such as Google, Apple, Alibaba, Xiaomi, who enter the financial sector. FCA notes that while these players have varied business models and input strategies, data acquisition and exploitation is essential in their business model.

As for traditional banking players, they seek to adapt by investing directly in FinTech in order to internalize certain innovations and create synergies or conquer new markets (eg. Societe Generale control fintechs Boursorama, Treezor and Prismea). In addition, these traditional players also enter into cooperation and partnership agreements, in particular with 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 (for example the agreements between Apple and the six largest French banking groups to offer Apple Pay to traditional bank customers). Finally, by investing in research and development, several banking groups are creating incubators, bringing start-ups into the payments industry in order to accelerate the digital transition and attract new customers.

Competitive analysis and FCA concerns

The FCA starts from a classic analysis of the definition of the market: are the services provided by new entrants compared to those provided by traditional banking players substitutable or complementary. He notes that the payments sector is a two-sided market characterized by strong dynamism. For now, it seems that the services introduced by the new players are complementary to those of the traditional players, but the FCA notes that this link can evolve rapidly, in particular by integrating these services into the offers of banks or, conversely, in FinTechs developing their own comprehensive banking offers. Consequently, CAF concludes that the dynamism of the market makes the exercise of defining the relevant markets more complex, in particular within the framework of the prospective analysis in terms of merger control.

The FCA also highlights the existing regulatory and economic barriers to entry and expansion in the payments industry, which is why innovative FinTechs use new technology 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 infrastructures, in particular the NFC antenna for smartphones and (ii) access to data which allows certain FinTech to offer their payment services as part of the application of the PSD2.

On the first barrier to entry (i), the FCA observes that effective access (opening or closing) to the NFC antenna on smartphones has a real impact on the capacity of players who have developed mobile payment solutions. contactless based on NFC technology to offer their services on devices equipped with these antennas. On this last barrier to entry (ii), it can be seen that various APIs developed by account-keeping payment service providers (“ASPSP”), in particular banks, are still not fully operational in France.

These are additional 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 hampering the development of payment initiation service providers and account information service providers.

Regarding this last risk, the FCA observes that developments in the payments sector could lead to a profound change in its functioning. For example, the deposit and cashing of checks and cash could be challenged. In addition, the FCA runs the risk for traditional banking players of being confined in the long term to execution tasks at significant fixed cost, while being marginalized in the distribution value chain. On the contrary, BigTechs could master certain innovative technologies, which could play a decisive role in the service chain in the future.