Hello, and welcome to Protocol Policy! Today we look at the regulatory pickle that comes with Big Tech entering the payments space. Also, Apple wants to take its 30% cut from boosted social media post purchases, and the Musk-Twitter deal is expected to close Friday.
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With all the news coming out of the U.K. in recent days, you’d be forgiven for overlooking its latest probe into Big Tech. Yesterday the U.K. Financial Conduct Authority said it would solicit views on the potential competitive harms of Big Tech’s expansion into financial services. In a 61-page discussion paper , the financial regulator outlined its thinking on the matter, with scenarios exploring how Big Tech could impact the payments, deposits, consumer credit, and insurance industries.
When it comes to payments, the FCA thinks Big Tech competition could actually be a good thing. The paper argues that, in the short term, Big Tech could help consumers by challenging the dominance of Visa and Mastercard, which together make up virtually the entirety of the U.K.’s card payment market. The FCA pointed to the standoff between Amazon and Visa in 2022 as an example of this already happening: Fed up with Visa’s interchange fees, Amazon threatened to boycott the payment processor and ultimately used its market power to negotiate a new deal with undisclosed terms.
But most companies aren’t Amazon, and don’t have a large enough retail presence to negotiate toe-to-toe with Visa and Mastercard. Given how diverse their businesses are, it’s not clear how Big Tech will really make a splash in finance beyond its core strengths, like Meta helping process payments when an ad on Instagram results in a sale. The FCA imagines a few scenarios, none of which involve Big Tech trying to beat the payment processors at their own game.
- In the first scenario, Big Tech uses its dominance in digital wallets to bargain over fees with payment processors and merchants. To see this in action, look no further than the PayPal-Amazon deal announced yesterday, which will allow customers to pay for Amazon purchases using their Venmo wallets — potentially cutting out Visa and Mastercard.
- The second scenario involves more direct competition, with Big Tech facilitating payments via alternative interbank systems, possibly involving blockchain. Meta tried that with the Diem stablecoin it backed and its ambitious Novi wallet. Both projects are dead, and Meta seems burned out on blockchain, but another tech company could conceivably try it.
- And the third scenario has Big Tech going after payment use cases that aren’t consumer to vendor. This is a smaller market that’s already competitive — think Venmo, Zelle, Apple Pay, Cash App, Meta Pay, etc.
Yet even with tech’s well-documented stumbles, the FCA worries about Big Tech becoming too dominant. The agency describes this competitive risk as Big Tech companies — most likely Apple and Google — becoming gatekeepers of in-person mobile transactions that would give them “the ability and incentive to exploit their market power.” The FCA also warns companies could “lock consumers in” and then place data restrictions on incumbent providers.
But this dominance depends on mobile wallets taking over — which is still far from guaranteed. Mobile wallets still only accounted for around 5.8% of in-store transactions in the second quarter of 2022, even as more than three in four U.S. retailers now accept Apple Pay. So Apple and Google are still a ways away from having the market positioning the FCA envisions. The agency argues that “while initial forms of entry may be hard to predict, once momentum builds, we might see significant market changes occur quickly.”
This waffling on the merits of Big Tech disruption points to a larger regulatory problem. Regulators often talk about not wanting to pick winners. But what if they already have, and an existing anticompetitive market gets replaced with a different anticompetitive market? In the case of card payments, two firms control virtually the entire sector today. This puts regulators in a pickle, where their efforts to block Big Tech from capturing a new market would mean protecting companies they already see as anticompetitive. We’re likely to see this play out in other realms, especially health care, where the incumbents don’t exactly come off as helpless victims of disruption either. Big Tech makes for big targets, but our problems clearly go much deeper.
— Hirsh Chitkara ( email | twitter )In Washington
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