Payment markets are attractive for BigTech companies
BigTech companies such as Facebook, Apple, Google, WeChatPay and AliPay earn money by using the data generated by the users of their platforms for targeted adverts, by enabling third parties to sell products through these platforms, or by selling products on the platforms themselves. In addition to the huge volumes of personal data already available to these companies, payment behaviour data can provide valuable information about customers’ preferences. Moreover, data on purchases and payment behaviour can give information about customers’ credit status. BigTech companies also see opportunities to make international payments more efficient and accessible, which gives them an incentive to become active on the payments market by developing their own payment services.
China takes the lead
In China, Tech giants such as Tencent and Alibaba play a pivotal role in mobile payments nowadays. Against the background of an inefficient retail payments system that was inaccessible to many consumers, these BigTechs managed to gain almost complete dominance of the mobile payments market in China within just two decades. Alongside payment services they are also offering credit and insurance, and their market share shows strong growth.
Access to the European markets
In recent years the three US BigTechs have entered the European markets, in many cases via the United Kingdom, after which they expanded to countries such as France, Germany and Italy. Amazon (since 2010, Luxembourg), Facebook (since 2016, Ireland) and Google (since 2018, Lithuania) are operating under both a payment institution licence and an electronic money institution licence, thanks to which they can offer the option of person-to-person payments. China-based Alipay (since 2018, Luxembourg) also holds both licenses.
BigTech companies deploy various strategies to become active in the payments market. Some build on existing payment infrastructure, cooperating with existing payment services providers, while others choose to offer innovative payment services on a newly developed proprietary or third-party infrastructure. Apple operates its ApplePay platform on existing credit card company infrastructures, whereas Facebook is developing GlobalCoin, a blockchain-based stablecoin, to enable international payments via Whatsapp. Despite their growing importance, BigTechs are still serving only a fraction of the total value of payments in the western world. Another strategy deployed by BigTechs – and also by banks - to enter new markets is by taking over successful startup companies.
PSD2 opens up new opportunities for BigTechs
Under the revised European Payment Services Directive (PSD2) banks must allow licensed payment service providers access to their customers’ current accounts, subject to the account holders' consent. PSD2 allows service providers to generate financial overviews for individual account holders based on their payment transactions, and to send payment orders to banks on behalf of current account holders.
Under PSD2, BigTechs that offer new services and are able to convince consumers to grant them access to their current account details will be able to combine the data on individuals and companies they already have with payment data, insofar the General Data Protection Regulation (GDPR) allows this. They can then use the combined data to gather insight into consumers’ purchase behaviour and credit status. Banks and payment institutions can also use these data, but they do not have access to the extensive information already in the hands of platforms such as Google, Facebook and Apple. That is why payment data are more valuable to BigTechs than to banks or other payment institutions.
Opportunities and risks
Due to their size, financial strength, international presence, customer contact frequency and IT expertise, BigTechs may develop into strong competitors to banks. Competition in the European payment markets may range from direct competition with existing parties to cooperative alliances and is set to boost innovation and efficiency. This will offer consumers more choices, new products and better services. At the same time, there are also risks. Where BigTechs are successful in engaging in competition with existing payment service providers and manage to expand their activities in the payment infrastructure, this may lead to more complex payment chains with increasing interdependence. Disruptions at BigTechs could then spill over to multiple countries and larger parts of the payments chain – which is also true for existing internationally operating payment service providers – and eventually lead to systemic risk. Other risks include a concentration of market power at one or a few BigTechs. Furthermore, the combination of payment data with large volumes of personal data could lead to privacy concerns on the part of the general public. Given the international nature of these developments, central banks and supervisory authorities are discussing at the international level whether the current supervisory frameworks are adequate to address them.