COMPETITION CONCERNS IN THE EMERGING SCENARIO

The BigTechs entering the financial services market may take over large parts of the value chain and become dominant in certain markets within large parts of the FinTech market. Companies like Apple, Facebook, Amazon, Google and Alibaba may transfer their strong position in other markets to the payment and financial services markets, on account of their strong technological edge, capital position, network effects and familiarity among consumers. In fact, transfer to the payments market is already happening: Facebook has an electronic money institution license in certain jurisdictions and offers payment services through Messenger Payments. Apple and Google also offer payment services through Apple Pay and Google wallet respectively. WhatsApp is also in the process of offering payment services. The incumbent players are apprehensive that they may get excluded from the payment and other financial services market progressively as they may not be in a position to effectively compete, given the advantages that these tech firms possess.

Mobile device manufacturers and operating system providers may also refuse to grant necessary access to third parties in order to maintain their position as gatekeeper. Banks have alleged that their request to seek access to smartphones for their digital wallets are denied. There is currently no regulation that ensures access to essential networks or infrastructures of BigTechs and any ex-post intervention by competition authorities to provide access to such facilities on grounds of ‘essential facility doctrine’ may be not only be time consuming but even unworkable for a rapidly evolving market like FinTech.

BigTechs may also drive smaller FinTechs out of the market or may rapidly acquire smaller FinTech companies. All this may lead to internalising / cannibalising the innovations of smaller FinTech companies. Closed standards applied by BigTechs could also limit innovation.

Concentration risks may arise if BigTechs acquire the global payments market. Payments landscape may change from the currently perceived utility function to a strongly commercially-oriented focus, and as a result, accessibility and affordability of payment services for vulnerable groups may become uncertain. Another risk could be collection and commercialisation of customer data, as it is at the heart of tech companies’ core business, unlike the traditional banks who do not use payment transaction data. Thus, under the emerging scenario, a BigTech company may be in a position to prevent effective competition from being maintained on the relevant market as it may have the power to act, to an appreciable extent, independently of its competitors, its customers and ultimately of the consumers. A dominant position could also be presumed if it is difficult to enter a market, due to the existence of network effects, switching costs or IP rights. Competition agencies and market participants have to remain vigilant that the advent of BigTech in the FinTech market, which can bring in transformational changes to the benefit of consumers, does not become an instrumentality to indulge in exploitative or exclusionary abuses, such as for imposition of unreasonable conditions or unreasonably high prices on customers, or to exclude competitors from the relevant market. It is important to state herein that competitive assessment of FinTech-related behaviour of companies deviates from the traditional ‘brick and mortar’ markets, in as much as technology markets exhibit specific characteristics that needs to be taken in to account while defining the relevant market and assessing the position of dominance in such markets. Technology markets are very dynamic and relatively small company can hold a dominant position with certain technology. As new markets can be very specific and narrow, small parties may easily be able to hold a dominant position. Emerging technologies may throw novel challenges for market definition, as in case of a private and closed block chain. Be as it may, dominance in such markets could be short-lived as a competitor can claim the dominant position in the market with more innovative technology at any moment. Continuous innovation is essential to be able to survive. Another characteristic of technology markets is the existence of network effects, i.e., a user will determine the value of a product based on the number of other users of that product. Those network effects can result in dominant position of a party.

The competitive landscape can also get adversely affected on account of the response of the existing parties towards FinTech companies. In order to protect their turf, the incumbent players may indulge in the anti-competitive conduct of foreclosure / exclusion or collusion.

The FinTech companies, mostly start-ups, operating across multiple business segments and offering new products or solutions, focus mainly on activities that will give them a competitive advantage over banks. They either do not require a banking license or require a license with less extensive requirements in comparison to those of the traditional banks. FinTech companies that offer payment services typically depend on banks as they maintain their clients’ bank accounts. Hence, FinTech companies very often seek out collaboration with banks. However, as the FinTech companies offer services to clients of banks, banks fear that they may lose their direct client contact making it more difficult for them to sell their profitable products, such as, loans, insurances and mortgages to their clients. While the increasing collaboration between financial and non-financial companies may stimulate the established financial parties to become more efficient, customer-focused and competitive, it is also likely that the banks, faced with introduction of new products or solutions, market disruption and competitive challenge caused by FinTech companies, may seek to exclude the FinTech companies by refusing to grant access to APIs (application programming interface) of banks, payment accounts or transaction data.

Players with high market shares may take commercial actions that could foreclose the market. Depending on the market shares of the incumbents, they could indulge in aggressive pricing strategies or tying and bundling different products and services together.

The existing players may also choose to selectively collaborate with the new entrants or co-opt them, all of which may be at the expense of consumers. On account of the wide range of services offered and the lack of transparency of the product specifications, consumers may not able to make a well-informed choice due to high search costs and consumer inertia may set in.

The incumbent players and / or the BigTechs may also choose to merge or acquire the FinTech start-ups which may result in an appreciable adverse effect on competition. Pertinently, many such mergers and acquisitions may escape the regulatory scrutiny of the Competition Authority. This is because the Competition Act 2002 provides for mandatory notification to the Competition Commission of India only where the prescribed financial thresholds are breached. Further, on account of the target exemption threshold of assets of Rs. 350 cores and turnover of Rs.1000 crores, acquisition of many promising and innovative start-up FinTech by established players or BigTechs that donot breach the above thresholds would escape the merger control scrutiny. The existing players may enter into joint production, joint selling or subcontracting activities with the FinTech, which could raise potentially anti-competitive concerns under certain conditions of market share and market structure. The existence of sufficiently large and ubiquitous network of interconnected systems / interoperability standards, could also be used by different banks and FinTech products, to deny access to the technical specifications required to develop interoperable products. The existing players may also introduce licensing regimes to prevent new players from becoming effective competitors. They could create new standards under the guise of introducing new products or improving quality so as to restrict competition in the market and to exclude new parties. Standardisation agreements amongst payment institutions must comply with competition rules so as not to restrict the ability of new FinTech companies to compete. Accordingly, standards setting must follow an open procedure, in which all competitors can participate. Further standard setting must be voluntary and not mandatory and access to the standards must be granted on fair, reasonable and non-discriminatory conditions.

The incumbents may also create entry barriers for the FinTechs on grounds such as false or misleading advertising, trademark infringements, trade defamation, and misappropriation of business trade secrets, which may impact their growth. The established players may also engage in collusive conduct with other market players to foreclose or exclude newer players. Arrangements may be made which affect competition with respect to pricing or other commercial terms, or which aim to allocate customers or markets. By participating in a platform which harmonises certain price elements, such as discounts, parties may indulge in concerted practice. Where any data is shared amongst competitors, whether as an integral part of the new technology itself (such as in block chain technology) or in order to facilitate FinTech development, information sharing concerns may also arise. A FinTech product operating on block chain technology may be used as a means to transmit detailed transactional information (such as customer, pricing and/or discounts, details about the transaction) to other participants within the block chain network. Similarly, information sharing risks may arise in the context of large, shared databases maintained for the purposes of facilitating FinTech developers or users. Concerns in relation to the authentication process involved in block chains may also arise, as participants on the block chain could strategically turn off their block chain servers in order to prevent an important transaction of one of their competitors from proceeding. This could potentially be an infringement if several participants act in collusion. Information sharing risks are particularly high if the information that can be obtained is current, granular and detailed, such that a competitor with access to the database could gain insights into current or future marketing strategies of independent market participants.

Further, a number of competitors may use algorithm to calculate an optimal price and in such a scenario it may not be necessary any longer to fix prices by mutual arrangement. The use of monitoring algorithms to ensure that every participant adheres to the price agreements may make the cartel more effective. Chat rooms and instant messaging services could be used by employees of banks, as was the case in coordination of Euribor and Libor interest rates by some of the world’s biggest banks and financial institutions.

Potentially anti-competitive consequences may also follow in cases of vertical agreements between Banks and FinTech, especially where the agreements contain exclusivity clauses, resale price maintenance clauses, tying and bundling clauses, particularly where the market shares are high.