New technologies operating in financial services industries are high on the priority list for European institutions. A recent European Parliament study emphasises the challenges in applying traditional competition law tools in the fast developing fintech sector, suggesting that a combination of competition law and other regulatory measures (in particular, financial regulation) will need to be utilised to ensure the competitive evolution of the fintech ecosystem.

European Parliament review of competition issues in fintech

Following publication of the European Commission’s fintech action plan in March, the European Parliament has this Summer issued a study examining potential competition concerns in the fintech sector.

• Pro-competitive and anti-competitive effects: The study acknowledges both the potentially pro-competitive and anti-competitive elements of fintech markets but is cautious to establish any definitive views on the existence of competition concerns, taking the position that the fintech sector is presently too nascent and fast-moving.
• Common framework: Instead, the study seeks to lean on experience in other financial and digital markets to provide a common framework for analysing fintech markets, allowing for identification, anticipation and management of any anticompetitive behaviours in the future. The framework essentially consists of consideration of the key supply-side characteristics of fintech markets (platforms and data) and demand-side characteristics (user access / operation and perception / behaviour) and highlights potential issues at the intersection of these characteristics.

Competition challenges in fintech markets are likely to be numerous

1. Difficulties in defining relevant market and market power

- There are inherent challenges in defining the relevant market(s) involved due to the fast-developing nature of fintech services, in particular, where these are offered via multi-sided platforms (which are prevalent in the fintech ecosystem).

- The study notes that traditional means of establishing market power (market shares, prices, profit margins etc.) may be inappropriate given that some services are offered at zero price or again through multi-sided online platforms.

2. Consequences of network effects

- Network effects can exacerbate competition concerns. This is because network effects arise when a product's value to one consumer increases with consumption / participation by other different sets of consumers and can result in a “winner takes all” outcome.

- The study notes that network effects can therefore increase barriers to entry and insulate successful participants in the market from competition, especially in highly concentrated markets or those where users tend to choose only one provider (so called “single homing”).

3. Interoperability issues

- The study foresees interoperability (the ability of computer systems or software to exchange and make use of information) as a key issue inhibiting the successful evolution of competition in fintech markets.

- Interoperability can raise challenges where incumbents use the lack of interoperability between technologies as an artificial barrier to entry for potential competitors.

4. Data leading to competitive harm

- Control of data is identified as a key feature of fintech markets which can lead to competitive harm.

- The study reinforces the framework of considering data as a competitive advantage (i.e. highlighting the impossibility of matching the data trove of successful incumbents), which can give rise to market power.

- The study also envisages the possibility of leveraging privileged data access to acquire a dominant position in new fintech markets relying on such datasets.

- However, the Parliament notes that typical competition tools alone may be insufficient to ensure that incumbents are not insulated from competition, noting that datasets may not be considered as “indispensable” to compete.

5. Algorithms can act to facilitate collusive outcomes

- While recognising the positive effects of algorithms through increasing transparency and more efficient development of products, the study suggests that these can also be facilitating factors for co-ordination and collusion between competitors (as reported in our Competition Enforcement Publication, there has recently been a focus on online retailers aligning their pricing algorithms).

- However, according to the study, algorithms also demonstrate the fast-changing nature of these markets and the associated difficulties for competition authorities. This raises difficult questions: for example, how should authorities deal with algorithms which develop, and learn that a collusive strategy is profit maximising?

Going forward, interested parties can likely expect identified challenges to be tackled through various tools

According to the study, the current nature of fintech markets means that the relevant competition issues are simultaneously difficult to analyse and potentially acute.

Indeed, the Parliament itself recognises the difficulties in using its traditional competition toolkit to intervene in such fast-paced markets, especially in light of the potential pro-competitive effect of fintech services in disrupting established markets.

Given these challenges, the study emphasises that current efforts at the policy level should focus on research and close monitoring of market developments. For this reason, we can expect the response of competition authorities to be accompanied by other, regulatory measures (in particular, financial regulation), to ensure the competitive evolution of the fintech ecosystem.