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Digital Finance and the Future of Competition Policy

Over the past several years, the emergence of digital financial services (DFS) in developing countries has raised questions about competition, especially as many markets are dominated by one or two providers. Today, these questions are shifting and gaining greater urgency as tech giants like Facebook, Google and Tencent disrupt the financial services sector. As recent commentaries have pointed out, current competition frameworks may not sufficiently equip regulators to respond to today’s challenges.

Mobile money agents in Tanzania. Photo: Junior Masanja, 2016 CGAP Photo Contest
Competing mobile money agents in Tanzania. Photo: Junior Masanja, 2016 CGAP Photo Contest

CGAP and BFA’s new paper, “Fair Play: Ensuring Competition in Digital Financial Services” (2019), begins by applying a standard competition framework to DFS. It lays out three types of impediments to effective competition:

  • Structural impediments are features of a product market that make it difficult for new entrants to challenge large incumbents. As structural characteristics, they are beyond the control of individual market actors. In the case of DFS, these impediments include network effects, sunk costs and economies of scale and scope.
     
  • Strategic impediments arise when dominant firms deliberately deter entry or unfairly disadvantage rivals with less market power. They may also occur when several competitors create a cartel, artificially inflating prices or segregating markets. Strategic barriers in DFS can include limiting access to communication and payments infrastructures, restricting agents through exclusive contracts, keeping data in silos and refusing to interoperate.
     
  • Statutory impediments stem from sectoral regulations that limit entry, favor incumbents or advantage a certain type of market actor. In DFS markets, licensing regulations and distinctions between requirements for banks and nonbanks can constitute statutory impediments to competition.

Regulators need to identify which of these impediments are leading to the problems they see in their markets. Since their structural characteristics make DFS markets prone to concentration, regulators and other stakeholders should be especially vigilant about strategic or statutory constraints to competition.

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In our paper, we highlight common challenges and ways regulators have attempted to address them in various jurisdictions. However, threats to competition are quickly evolving along with technology. Looking ahead, policy makers must be prepared to grapple with complicated issues that arise from two trends: big tech companies’ expansion into financial services and the rise of data as a competitive asset.

For all the attention these trends get in the United States, Europe and East Asia, little has been written on how they will affect competition in the financial services industries of developing countries — and even less has been written on the implications for financial inclusion. Below are five debates that are increasingly relevant to policy makers everywhere:

  1. Do we need stronger restrictions on self-preferencing? The emergence of platform business models gives rise to questions about when selling your own goods and services through a marketplace you control is anticompetitive. India recently placed restrictions on e-commerce platforms due to such concerns. In the European Union, self-preferencing is not anticompetitive per se but must be tested on a case-by-case basis to determine the extent of its anticompetitive effects. Recently, a panel of experts submitted a report to the E.U. Competition Commissioner arguing that when a dominant platform engages in self-preferencing, the burden should be on the platform to prove that its behavior is not exclusionary. In September, a German commission published a report recommending a code of conduct for dominant platforms that prohibits self-preferencing.
     
  2. When should mergers face additional scrutiny? Competition advocates are also calling for changes to merger guidelines for digital platforms. Traditionally, mergers face increased scrutiny when turnover, such as annual revenue, surpasses specific thresholds. But as the recent Stigler Center Committee on Digital Platforms writes, “[S]imply focusing on turnover is not enough,” especially because the target companies may have little or no turnover at all — for example, they offer products and services for free, like WhatsApp. Payal Malik, the chief economist of the Competition Commission of India, raised concerns about consolidation that may occur in this “blind spot.” Because these markets are prone to excessive concentration, merger analysis should be more nuanced and consider long-term effects on competition. The Furman report to the U.K. government makes a similar plea, arguing that “merger assessment in digital markets need a reset.”
     
  3. How should regulators measure consumer harm? There’s a broad consensus that using prices as the barometer of consumer welfare is no longer fit for purpose in certain markets. Consumers often receive digital products and services at zero cost, particularly when those products are offered on platforms. This makes it difficult to conceptualize and measure consumer harm that comes about from anticompetitive behavior. The Stigler Center contends that zero price does not mean zero harm. Customers pay in other ways: through their data, loss of privacy, lower quality or slower innovation. It is even possible that prices should be negative (i.e., firms pay customers for the value of their data). A U.S. publication recently argued that quantifying harm should not be necessary: “[C]lear and convincing evidence of anti-competitive intent should be taken as a presumptive evidence of harm” (aligning U.S. law closer to E.U. law). On the other hand, some competition authorities and advocates have argued that consumer harm should take into greater consideration the distributional effects of anticompetitive behaviors, particularly on vulnerable consumers.
     
  4. Do we have the right institutions and remedies? A lively debate centers on whether current competition authorities can adequately respond to today’s challenges and whether new authorities are necessary. These debates may seem irrelevant for low-income countries, which do not always have competition authorities. Nonetheless, such countries can learn from the challenges facing countries with more advanced competition regimes. For example, some academics have argued that countries should establish a digital authority that would oversee all issues related to competition and digital platforms. Padilla and de la Mano (2018) make a similar proposal for a digital clearinghouse. Advocates for stronger competition policy argue that institutions should focus more on making structural changes than on imposing fines for anticompetitive behavior, that greater international collaboration among authorities is critical and that both remedies and ex ante interventions should limit the use of data that entrenches dominance. In the context of finance, this could mean imposing open banking regimes or data portability (as specified in India’s draft Data Protection Bill).
     
  5. Have we forgotten the links between market power, inequality and political power? Increasingly, discussions about competition highlight its link to inequality — specifically, how greater market power breeds greater inequality. A recent publication by BRICS Competition Law and Policy Center calls for integrating reduced inequality into the goals of competition policy. South Africa is somewhat unique in that its competition regime explicitly aims for greater economic inclusion. This political dimension harkens back to the origins of antitrust law, which expressly addressed the links between market power and political power. (For more on the history of competition law, read Tim Wu’s "The Curse of Bigness.")

While this high-level summary only touches on the ongoing debates that will surely continue, it should give a sense of the questions that remain. It’s impossible to think about competition in DFS today without recognizing and addressing the broader context around the future of competition policy.

Topic: Policy

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Publication

In addition to the behavior of market actors, regulation can have a substantial impact on the dynamics of competition in digital financial services markets. CGAP examines some regulatory levers that policy makers can deploy to promote more competition in emerging economies.

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