Goldman Sachs can’t make profits in the FinTech sector, as reported recently in the Financial Times newspaper. Competition must be tough. Where is competition coming from?
A source, still arguably on the edges, is BigTech, who are using FinTech essentials (digital technology and big data) to become a player in the financial services market. To the extent this is done through the provision of online intermediation services, the EU’s Digital Markets Act (DMA) may be the vehicle by which BigTech’s financial services ambitions are kept under competition and (possibly) regulatory control.
The potential importance of the DMA to controlling BigTech cannot be understated, given BigTech companies are far more risky than conventional banks (consider the sudden financial fragility of Twitter and the failure of FTX, with no government standing behind as the lender of last resort). Moreover, a key element today of competition in the financial services sector is information generation, something that BigTech is naturally good at, while the traditional banks are playing catch-up. Regulation in the EU and UK of BigTech FinTech is likely to be a particularly sensitive issue given BigTech entities are largely USA-headquartered entities (e.g., Google, Facebook), and those that are not are headquartered in Asia (e.g., Alibaba).
Despite their threat, BigTech appears to have a preference for development through collaborations. For competition authorities and regulators this creates the more complex ‘coopetition’ framework for analysing the effects of actions by market participants. Potentially, this more complex framework might allow BigTech to emerge unseen as the financial sector’s new giants. Their presence in relation to the financial payments sector is already material. Traditional banks, of course, are not asleep at the wheel. They have been active in acquiring FinTech start-ups, or at least collaborating with them, but as Goldman Sachs' results show, success is far from guaranteed.
If information sharing is a key element in the competitive landscape, the DMA may be the vehicle that allows traditional banks and start-ups to at least try to compete on a level-like playing field. The international trade aspects will also play a role. It will, for example, be interesting to see how India and the UK concretely identify and encourage, through a trade agreement or otherwise, the use of FinTech to deepen trade relations between the countries, while each country stays sensitive to the key factors of (i) competition in and for the market, (ii) customer protection, and (iii) the balance between innovation and financial stability.
