The rapidly evolving payments sector is raising a number of new competition-related issues, attracting interest from both competition and financial sector authorities. In a new publication, we look at five emerging trends in this area: (i) increased scrutiny of Big Tech under abuse of dominance rules; (ii) the use of “soft enforcement” tools; (iii) competition objectives driving the regulatory agenda; (iv) enhanced scrutiny of digital / payment mergers; and (v) competition issues around global stablecoins and alternative payment systems.

Emerging trends in a fast-paced sector

The digitalisation of payments markets and entry of new players, including Big Tech, are raising a number of competition-related concerns, drawing attention from market participants, financial sector authorities and competition authorities alike. Against this backdrop, we have released a new publication exploring five emerging trends in the area. The key takeaways are outlined below. 

1. Big Tech and concerns over abuse of dominance 

Big Tech’s entry into the payment space is a source of many competition-related concerns. In particular, based on experience in digital markets, authorities worry that Big Tech players could potentially abuse their dominant positions, for example to preference their own services or restrict interoperability with their products.

European authorities seem to be keeping an increasingly watchful eye out for this type of behaviour. Notably, this month the European Commission announced that it has opened a formal antitrust investigation to assess whether Apple’s conduct in connection with Apple Pay violates EU competition rules.

This is not the first scrutiny of Apple Pay, with concerns previously having been investigated in Switzerland in response to a complaint by Swiss fintech company, TWINT. The Swiss Competition Commission ultimately closed its investigation after Apple committed to provide a “technical solution” to address the concerns of the complainant.

2. Use of “soft enforcement” tools

Another recent trend has been the broad use of market studies and inquiries to examine competition issues in the payments sector. For example:

• In the UK, the Financial Conduct Authority and Payment Systems Regulator have used these tools as their primary means of examining competition issues in financial services. This includes, for example, the PSR’s ongoing market review into the supply of card-acquiring services. 
• In the Netherlands, the Authority for Consumers and Markets has launched a market study into the activities of major tech firms in the Dutch payments market. It is looking at the existing and potential activities of both US and Chinese players.
• Similarly, in France, the Autorité de la concurrence has launched a public consultation into the fintech sector, with a focus on the development of the role of large digital platforms in payment services.  
• In Greece, the Hellenic Competition Commission is also carrying out a sector inquiry into fintech. 

These tools can be used as a means of “soft enforcement”, helping competition authorities and sector regulators to identify and address systemic issues affecting competition. They can also serve as an important information gathering tool. However, they have in the past attracted criticism as ineffectual and an inefficient use of vast amounts of time and resource.

3. Competition objectives driving the regulatory agenda

Competition objectives – in particular, concerns around maintaining a level playing field – were driving the last wave of European payments regulation and are likely to drive the next. 

For example, a key aim of the EU’s revised Payment Services Directive (PSD2) was to “open up payments markets to new entrants leading to more competition, greater choice and better prices for consumers”. Notably, its focus in this regard was on tackling the incumbency advantage of traditional banks. 

There are now concerns that the playing field could tilt too far in favour of Big Tech and the Commission’s expert group on regulatory obstacles to financial innovation (ROFIEG) has made a number of recommendations to address this. For example, it recommends legislative action to broaden and even out the use of user-driven data sharing, which may require Big Tech to share access to more of the valuable customer data they hold. It also recommended new rules to prevent large, vertically integrated platforms from unfairly discriminating against downstream services that compete against their own downstream services. 

The Commission has since launched a consultation on a Retail Payments Strategy for the EU. Notably, the consultation paper discusses the potential opportunities for pan-European payments solutions to thrive and to “reduce EU dependency on global players, such as international card schemes, issuers of global “stablecoins” and other big techs”.

4. Merger control: enhanced scrutiny of digital payments deals

2019 saw intense global debate about whether merger control rules remain fit for purpose in the digital era. There is a perception that potentially problematic deals have been slipping through the net, either because they are not being notified in the first place (having not triggered relevant thresholds) or because they are not sufficiently scrutinised during merger control review. 

In a commonly quoted statistic, over the last decade, Amazon, Apple, Facebook, Google and Microsoft have together made over 400 acquisitions, but only a handful were reviewed by competition authorities and none blocked.

This has led to a host of studies across the globe, which are likely to result in enhanced scrutiny of deals going forward. The emerging themes include:

• Use of deal value thresholds, proposed as a way to catch “killer acquisitions” (designed to eliminate sources of potential future competition) which may not otherwise be notifiable due to low target turnover. While deal value thresholds have been introduced in Austria and Germany they appear to have been ruled out in the UK and at an EU level.
• The need to look at counterfactuals in considering whether a target constitutes “potential competition” to the acquirer. For example, in the absence of the merger, could the target have become a realistic challenger to the acquirer in question?
• Conglomerate effects – i.e. the notion that a merging party will be able to leverage a strong position in one market into a related market and use its strengthened position to foreclose competitors through tying and bundling strategies. 

The European Commission may explore at least some of these themes in its review of Mastercard’s proposed acquisition of Nets’ account-to-account payment business, for example. The Commission has accepted a referral request from a number of national competition authorities to review the transaction, concluding it is best placed to examine potential cross-border effects. In accepting the referral, the Commission noted that the transaction threatens to significantly affect competition in a Nordic or EEA / UK-wide market for the provision of real-time account-to-account central infrastructure services.

5. Global stablecoins and state-backed alternatives

Global stablecoin proposals, like Facebook’s Libra, offer the promise of healthy new competition for retail payments markets. This could help drive benefits for consumers, particularly in the areas of financial inclusion and cross-border payments.

At the same time, new payments infrastructure that involves wide industry collaboration and the likelihood of rapid global scaling may pose a threat to fair competition (as well as raising other policy risks, for example around monetary policy and financial stability). 

In particular, the involvement of Big Tech has raised concerns in some corners around the risk of markets tipping in their favour due to, for example, network effects and the exponential benefits of access to data. As a result, in addition to action from financial sector authorities, the European Commission has already started an antitrust probe into Libra (i.e. well before any launch).

Concerns around the risks posed by global stablecoins have led to a number of policymakers considering state-sponsored alternatives. 

Various central banks have accelerated research and/or development work around central bank digital currencies (CBDCs). For example, the Bank of England, which has not previously been an active proponent of CBDCs, published a discussion paper on a “platform model” CBDC for retail use earlier this year. 

CBDCs, however, raise their own issues. For example, depending on how it is designed, a CBDC may benefit from certain structural advantages over competing commercial initiatives. This could potentially risk displacing certain elements of the commercial market, to the detriment of the diversity and resilience of the overall payments landscape.  

As well as exploring CBDCs, the European Central Bank has welcomed a strategic initiative by a consortium of European banks to create a new alternative retail payment system. This type of industry-led/ state-backed solution may also raise competition concerns – for example, as a result of competitor collaboration and/or any structural advantages such an initiative would involve.

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Should you have any questions around competition-related issues in the payments sector, or the payments sector more generally, please don’t hesitate to get in touch.