The market entry of non-traditional financial entities (like FinTech firms) and large nonfinancial operators (i.e., BigTechs), which make intensive use of new technologies in the design and marketing of financial products and services, with additional and integrated functions, is resulting in a boost to the digitization of the sector and a reported increase in competition in the banking and financial sector. In this rapidly evolving context, new risks arise for customers, and further challenges are being faced by market conduct supervisors.
This report is based on the responses to FinCoNet Standing Committee 3’s “Questionnaire on market conduct supervisory implications of NTEs (e.g., BigTechs, FinTech firms) offering financial services, especially payments”, which was distributed to FinCoNet Members in October 2022 and was open for responses until December 2022.
The report aims to:
- Explore the importance assumed by NTEs entering the payments ecosystem and financial services market more broadly;
- Identify particular risks for consumer protection and the challenges faced by market conduct supervisors;
- Collect market conduct supervisors’ approaches and initiatives.
The following key findings emerge from this Report:
Market changes due to the entry of NTEs
In the vast majority of the jurisdictions, at least one NTE provides digital payment services. FinTech firms, BigTechs and payment gateway providers are the most active, offering a wide range of services such as e-money accounts, digital wallets and payment initiation services.
NTEs, in particular FinTech firms, also offer other financial products, such as new forms of credit or credit-like products, (e.g., BNPL), crowdfunding services, account information services, investment products and crypto assets.
In terms of how NTEs enter the payment services market, partnerships with incumbents prevail; other strategies include direct entrance into the market (e.g., BNPL operators, FinTech firms specialised in credit transfers) and partnerships with card networks.
The entry of NTEs into the retail financial services sector has brought about changes in the market structure, especially in terms of increased market competition; further effects include fostering of technological development, increased interoperability, cost reduction and enhancement in financial inclusion.
Incumbents have reacted to the entrance of new players by creating partnerships with innovative operators (including FinTech firms), increasing investments in research & development, changing business models and finally, albeit less frequently, acquiring NTEs.
Risks to consumers and challenges for market conduct supervisors
The entry of NTEs into the payment services market presents the following key risks to consumers: cybersecurity risks, data protection issues, lack of information transparency, difficulties in comparing products and services and potential price discrimination. Scalability and competitive advantages of BigTechs were also mentioned among the relevant issues, as they could be uniquely well placed to scale the entry barriers of card schemes by using their technological expertise and large existing customer bases and they could become gatekeepers for in-person or online transactions, resulting in reduced incentives to innovate.
FinTech firms, digital platform providers and BigTechs are deemed as the most challenging types of institutions from the perspective of market conduct supervision.
Supervisory gaps emerge, due to the difficulties in including NTEs and the services they offer within the regulatory perimeter. In many cases, existing regulation only covers them indirectly, that is, when they enter in the market in partnerships with incumbents or if they offer a specific service. This is the reason why the most significant challenges materialize when NTEs offer services directly.
In relation to the risks above, the following key supervisory challenges have been identified by the authorities: the need for enhanced supervisory skills, ensuring appropriate internal controls by NTEs, identifying who should be responsible for operations, coordinating with other entities/authorities, ensuring uniformity of rules, preserving market competition and, at the same time, financial inclusion of less digital consumers.
Regulatory and supervisory responses
Most responding jurisdictions have specific regulations and supervise FinTech firms, while other NTEs (e.g., BigTechs, MNOs, payment gateway providers, digital platform providers) are not covered by a dedicated regulation, and are subject to supervision as long as they are licensed; however, in some cases they may fall under the scope of existing regulations (e.g., if regulation is activity-based or product-based, rather than based on the type of firm).
Regulators and supervisors are undertaking a range of actions in response to the entry of NTEs; the approach most commonly adopted by jurisdictions is monitoring developments through tools like innovation hubs and regulatory sandboxes or industry consultations and thematic reviews. To a lesser extent, new regulations have also been adopted or the regulatory perimeter / scope of existing regulation has been expanded.
In terms of supervisory powers, in most cases the authorities exercise the same powers as for any other institution offering the same services, as only in limited cases fewer powers are mentioned (limited to the incumbent financial institutions partnering with NTEs). Regarding supervisory tools, authorities have already in place or plan to use specific supervisory tools to monitor or analyse the digital payments activity or business models of these firms (e.g., implementation of dedicated oversight teams, proactive engagement meetings with larger firms, use of artificial intelligence and natural language programming).
Various initiatives on the supervision of the payment activity of NTEs have been undertaken or are undergoing in several jurisdictions to address market conduct challenges of these entities and to mitigate the risks for consumers. In some cases, these are targeted supervisory initiatives (e.g. thematic reviews, issuance of guidance, etc.) and in other cases other they are not directly related to supervision (e.g., proactive engagement with incumbent financial institutions, dedicated working groups, information initiatives to raise awareness on the use of digital channels to access banking products/services).
Authorities deem that the challenges posed by NTEs require a stronger cooperation both at domestic and international level.
