Mark Taylor
Senior Editorial Manager
The UK’s financial regulators are probing the risks surrounding digital wallets such as Apple Pay, Google Pay, and PayPal, and laying the groundwork for further regulation of digital payments.
The Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) have issued a call for information as they seek to understand the impact on consumers and businesses that digital wallets’ increasing popularity creates.
Over the last 12 months, supervisors in the US and Australia have opened similar investigations. They are concerned that non-bank entities are offering services such as payments similar to that of banks or credit unions, but skirting the onerous regulations that come with being a regulated institution.
“Digital wallets are steadily becoming a go-to payment type and while this presents exciting opportunities, there might be risks too,” said David Geale, the PSR’s Managing Director. “Collaboration between regulators and working with industry is crucial to ensure we’re on the front foot to support innovation and competition, making sure everyone benefits from access, protection and choice in payments.”
Whilst the call for information will consider issues relating to digital wallets in general, regulators called out the focus on those operated by Apple, Google (Alphabet), PayPal and Amazon, specifically.
Why are financial regulators concerned about digital wallets?
Big Tech has cornered the market for digital wallets, with more than half of the UK’s adult population using one, the FCA said.
The rapid expansion of large, mostly unregulated technology providers into area of traditional financial services has concerned regulators, who cite potential competition, consumer protection and market integrity issues as concerns.
“The UK is seeing a seismic shift in how people pay, as digital wallets become a part of everyday life for many people,” said Nikhil Rathi, the FCA’s Chief Executive. “We want to make sure we can maximise the opportunities and benefits for consumers and businesses while protecting against any risks this technology may present.”
Previously, the PSR has reviewed similar issues surrounding contactless mobile payments and the FCA has probed Big Tech’s burgeoning activity in financial services.
The call for information is open until 5pm on September 13, 2024, and the regulators plan to give an update early next year, they said.
What aspects of digital wallets are the FCA and PSR reviewing?
For the PSR, how digital wallets impact consumers’ choice of payment options at checkout is the area it is most interested in.
It said it hopes to learn more of the implications of digital wallets’ growing role in payments, and review the competition between payment systems. The PSR has a strategic objective of unlocking the potential of account-to-account payments.
The FCA’s regulatory remit allows it to review the competition digital wallets have in the supply of financial services, and the operational resilience and systemic safety of the UK financial services sector.
Competition aspects make up a large part of the UK’s probe.
As Apple Pay and Google Pay are part of two huge mobile ecosystems via phones, they come with large installed bases, strong brand attachment and network effects, the regulators said.
“As a result, Apple and Google may be able to influence how digital wallets (or other ways of initiating payments) work on mobile devices or are accessed by consumers,” the call for information said.
This means they could limit how other digital wallet providers can utilise the features and functionality of mobile devices, web browsers, mobile operating systems or operating system application programming interfaces, or steer payments to be made in a certain way – for example, through rules or defaults, the regulators said.
The call for information also asks if the FCA’s regulatory perimeter should be expanded to cover digital wallets, in the event a system outage or other disruption to service, or in cases of fraud, should prompt a greater level of supervision.
Digital wallets and competition barriers
“There has been a significant amount of interest on this issue internationally, including by the European Commission and the US Department of Justice,” the FCA said.
Last year, legislators in Brussels closed an antitrust case against Apple following an agreement by the tech behemoth to allow free access iPhone’s Near Field Communication (NFC) functionality to other mobile wallet apps, resolving the claim of abuse of dominant position.
In March, US justice officials opened a sprawling antitrust complaint against Apple and its iPhone business, targeting the California-headquartered firm over the financial services aspect of its operations. Prosecutors are probing specifically how Apple Pay could block competition and earn the tech firm billions of dollars a year in the process.
The DOJ allege that Apple chokes competition among payment services, and blocks innovation, as the fees that banks and others pay to play with Apple Pay may stymy their appetite to develop other kinds of services that might rival Apple.
In November, the top US consumer finance watchdog announced it wants new powers to regulate the technology firms that offer digital wallets and payment applications.
The Consumer Financial Protection Bureau (CFPB) said the likes of Google. Amazon, Meta, Square, and Apple should be subject to financial examinations similar to that of banks or credit unions.
The rule proposed would ensure that nonbank financial companies handling more than 5m transactions per year adhere to the same rules as large banks, credit unions, and other financial institutions already supervised by the CFPB.
“Payment systems are critical infrastructure for our economy. These activities used to be conducted almost exclusively by supervised banks,” said CFPB Director Rohit Chopra. “[The] rule would crack down on one avenue for regulatory arbitrage by ensuring large technology firms and other nonbank payments companies are subjected to appropriate oversight.”
Key takeaways for firms
As Big Tech pushes further into financial services, regulators are increasingly keen to ensure the guardrails can cope.
The UK has become the latest jurisdiction to consider whether nonbank entities able to provide financial products and services to consumers and businesses should be subject to greater regulatory oversight.
For the tech firms, the prospect of financial regulators conducting reviews of their regulatory compliance operations, systems and controls may be alien.
Banks should also keep a keen eye on the developments, from the perspective of competition, their own partnerships with technology firms, and the regulatory fallout that may occur should a new set of rules for digital wallets and payment services emerge.
The phenomenal growth of digital payments over the last decade, and the pace at which technology firms have surpassed banks at offering such services to customers, has redrawn the competitive landscape.
Regulators are attempting to play catch up. Any fintech, Big Tech, non-bank payment firm active in the digital transaction space should be aware of what is coming on the horizon, and develop a robust compliance strategy ready for the level of examination coming down the line.
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