White Label: The Technological Illusion of Competition

A. White Label and Regulatory Arbitrage

Regulatory arbitrage occurs when companies organize their activities to limit their regulatory exposure. ¹⁵ For example, oil companies may outsource their oil transport to limit their exposure in case of a spill. ¹⁶ Regulatory arbitrage depends on the ability to divide supply chains into tasks, the tasks existing as a standalone service, and the amenability of the regulation.

Regulations can facilitate regulatory arbitrage by limiting liability to the agent carrying out the services. ¹⁷ These regulations hold the agent/decision-maker liable but do not extend liability to the company hiring their services.

However, some regulations (e.g., environmental law) have extended liability to the entity that contracts out the service through vicarious liability. For example, the Oil Pollution Act implicitly created a vicarious liability ¹⁸ and included the owners and operators of vessels or facilities spilling oil under the “responsible parties.” ¹⁹ Without vicarious liability, regulatory arbitrage can benefit contracting parties while creating externalities on third parties.

Other regulations have extended liability from the agent to the principal through joint and several liability of both parties. For example, the Finance Act 2016 made online platforms jointly and severally liable for unpaid VAT of non-UK businesses that use their platform services. ²⁰ Joint and several liability can still benefit the company that is contracting out because it can still receive some contribution from its contractor. ²¹

Regulatory arbitrage and white labeling often go hand in hand. Like regulatory arbitrage, white labeling allows companies to specialize, which can benefit society through learning by doing or economies of scale. However, white labeling also allows companies to shift the regulatory burden in two possible ways.

First, the seller of white label services may comply with the regulation and saves the purchaser of its services from having to comply with the regulation. For example, moneyinfo provides a white-label RegTech application that allows wealth managers to communicate securely with their clients. ²² Moneyinfo has built its system so as to comply with the General Data Protection Regulation to ensure that their clients do not violate the privacy laws. ²³ In case of a breach, the data processor becomes liable, which may differ from the data beneficiary.

Second, the seller of white label services may sell its services as is and shift the regulatory burden on the purchaser of white label services. For example, Uber presents itself as a technology company and “describes the software it provides as a ‘lead generation platform’ that can be used to connect ‘businesses that provide transportation’ with passengers who desire rides.” ²⁴ Through this approach, Uber has classified its drivers as independent contractors. ²⁵ It avoids not only having to pay employment benefits but also having to hold a taxi license.

These regulatory burden shifts create a principal–agent problem because, in both situations, the entity liable for regulatory failure does not take some of the regulatory-impacting decisions. Due to the principal–agent problem, the entities may not take the efficient level of care in complying with regulations. This shift in regulatory burden has started to worry financial regulators. The next section discusses banking as a service and its relationship with regulation.

B. Banks Providing White Label Services

In recent times, the FinTech sector has expanded into areas traditionally reserved for banks. However, to do so, FinTech companies have two options. First, they can obtain a banking license and become banks themselves to comply with the banking regulation. However, this process has been so cumbersome that in the 2012–2022 period only six FinTech became banks in the United Kingdom (see Table 1). For example, Revolut operated an “electronic money” service but did not hold a license. ²⁶ Eventually, Revolut sought a bank license to expand its services. ²⁷

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Table 1.

Summary Statistics of UK FinTech Start-Ups.

Company TypesVariables	Companies Self-Identifying as Software or Technology Companies a	Companies Self-Identifying as Banks a	Companies Self-Identifying as Financial Institution or Intermediary a	Companies Self-Identifying in Other Categories a
Observations b	30	6	26	9
Average amount raise per companyc,d	$249,929,000 ($353,908,299)	$678,957,333 ($424,433,641)	$226,200,939 ($364,830,865)	$202,921,667 ($87,658,711)
Average amount raise per company per yearc,d	$74,973,316 ($171,791,379)	$349,977,564 ($278,364,915)	$588,890,037 ($2,469,453,661)	$54,137,400 ($28,465,784)
Registered and/or regulated by the FCA e	0.567	1	0.846	0.444

Note: FCA = Financial Conduct Authority.

a

Identification from Company House (https://find-and-update.company-information.service.gov.uk) using the Standard Industrial Classification of economic activities (SIC).

b

Companies less than ten years old classified as FinTech companies on Crunchbase (https://www.crunchbase.com/) and having raised over $50 million.

c

Financial data from Crunchbase as of February 28, 2022.

d

Standard deviation in parenthesis.

e

Registration with the Financial Conduction Authority (https://register.fca.org.uk/).

Second, FinTech companies can enroll the help of existing banks who already comply with the banking regulations. This is what Revolut did for many years:

Funds [were held] in accounts with a tier one UK bank, as per our obligations under the e-money regulations. Plus, all of your card transactions are processed by the Mastercard or Visa network and are protected by Mastercard or Visa rules. ²⁸

The Federal Reserve Board (FRB) categorizes this approach as banking-as-a-service transaction. The FRB defines banking-as-a-service when a bank partners with a FinTech company; the FinTech then interacts with customers and provides banking services (e.g., lending, end-to-end transactions) through the support of the bank. ²⁹ The customer may not know who provides the banking services. In other words, banks offer their white label services to intermediaries who then transact with third parties. The FRB also refers to this as “front-end FinTech partnerships.” ³⁰

For example, Affirm is a U.S. FinTech company that allows consumers to spread out payments for items purchased at participating retailers. ³¹ Affirm also offers savings accounts. These funds are held with Cross River Bank. ³² Cross River Bank provides the white label services ³³ and allows FinTech companies like Affirm to provide their offering while complying with the regulation. ³⁴ Cross River Bank is a FinTech itself and also provides banking services directly to the public. ³⁵

Banking-as-a-service can benefit many unbanked individuals. ³⁶ The FRB hopes that technology can help reach individuals that banks cannot reach. However, banking-as-a-service has also raised some concerns. These services have allowed FinTech companies to provide regulated services without being regulated. For example, some online lenders have offered lending services but have relied on a small bank to underwrite the loan. ³⁷ This approach has allowed these intermediaries to charge interest rate beyond the regulated interest rate limits. ³⁸

The National Consumer Law Center identified a number of small banks that provide such banking-as-a-service offering. ³⁹ They have warned customers against this business model because it can lead to higher rates. Regulations create barriers to entry, whereas white label creates more opacity. The combination means that consumers cannot rely on competition to keep prices low.

Policymakers have to balance regulating these issues against stifling innovation. Empirical studies have showed that regulations in the finance and banking industry have ambiguously impacted innovation. ⁴⁰ On one hand, regulations may prevent financial institutions to innovate because these institutions have remained compliant with the regulations. On the other hand, regulations can spur innovations to gain a competitive advantage and to find ways to circumvent these regulations.

As compared with the United States, the United Kingdom has taken a different approach. The UK government has given more weight to the stifling of innovation argument. The UK Financial Conduct Authority (FCA) has created a regulatory sandbox where any company can “test” services with real costumers and introduce these services to the market in less time. ⁴¹ The FCA changed this sandbox to accommodate FinTech following a review of the FinTech landscape. ⁴² But this approach gives FinTech companies a competitive advantage over more established financial companies: they face less regulations.

In the United Kingdom, Crunchbase identified 120 UK-based FinTech companies ⁴³ that raised over $50 million before February 2022. Of those companies, seventy-seven were less than ten years old, which could be considered “young” companies. Of those seventy-seven companies, two companies went public, one filed for administration, and three were acquired. Table 1 shows some summary statistics for the remaining 71 companies.

Most of the UK FinTech companies that self-identify as software or technology companies have registered with the FCA and are regulated as payment services or electronic money service providers. By contrast, all banks are fully registered and regulated with the FCA. These FinTech companies have raised more funds. Almost all financial intermediaries are registered and/or regulated.

Much of the development in FinTech has come from B2B markets. ⁴⁴ This B2B is where much of white labeling occurs. Among the start-ups identified in the table, some companies specify that they provide white label services. For example, Chetwood Financial describes some of its offering as “bank-as-a-service solutions.” ⁴⁵ As part of its offering, Chetwood Financial provides a wide range of services that can be rebranded. ⁴⁶ However, third-party entities have used this ability to white label to defraud some consumers: “clone firms” pretend to be or work with the regulated firms to defraud the public. ⁴⁷ White labeling can lead to more fraud: because Chetwood Financial provides white label support to many companies, consumers may struggle to identify who they support.

To increase its bank-as-a-service offering, Chetwood Financial acquired Yobota. ⁴⁸ The Chetwood Financial Head of Corporate Development claims that these services can help increase competition and challenge “legacy banks.” ⁴⁹ As shown in Table 1, the number of new companies being able to provide full-service banking-as-a-service and compete is limited. Instead, most companies tend to specialize as software providers or intermediaries with limited capacity to compete. Therefore, FinTech could be trading a fully integrated vertical monopoly of legacy banks with a vertically disintegrated production chain with a few competition choke points.

C. Banks Using White Labeling Services

As Table 1 shows, more FinTech start-ups self-describe as software or technology companies than they do as full-service banks. Companies may decide to offer white labeling services for many reasons. A rational service provider would do so if they profit more from specializing in software development and spreading their costs over multiple downstream entities than they would from offering their services to the public. These FinTech companies compete for a “task” along the supply chain instead of the supply chain.

This “task” approach allows them to externalize the regulatory burden onto the public-facing service provider. For example, Rapyd, a start-up created in 2016, offers a myriad of financial services. ⁵⁰ Among its offering, Rapyd offers a “white label” model where it “license[s] its technology to other companies.” ⁵¹ Different companies can adopt Rapyd’s technology and compete for consumers. Rapyd’s move to offer white label services was prompted because it faced regulatory constraints. ⁵²

Companies like Rapyd offer their services to banks or other institutions that are already regulated. Since these institutions already carry the compliance burden, the white label service providers do not have to duplicate those costs. This decrease of cost duplication could encourage competition because it decreases a barrier to entry at the white label service provider level.

However, without full transparency, service purchasers may not realize that they are responsible for the ultimate compliance. In its 2018 interim report on platforms, the FCA found that compliance with the rules was an issue when using white label services. ⁵³ The FCA, however, did not find it necessary to change its regulatory approach. ⁵⁴

The FRB labeled banks using FinTech white label services as “operational technology” partnerships. ⁵⁵ Through these partnerships, banking institutions hire FinTech companies to enhance their processes. ⁵⁶ In other words, FinTech companies provide white label services to the banks. The FRB warned about the risks associated with these relationships. ⁵⁷

In 2021, the FRB, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency wrote “Interagency Guidance on Third-Party Relationships” and opened a public consultation. ⁵⁸ These U.S. agencies have put in place this guidance because reliance on white label services has increased: including “core bank processing, information technology services, accounting, compliance, human resources, and loan servicing.” ⁵⁹

This increased reliance on outsourcing and white labeling has increased monitoring costs for financial institutions. Because of these increased costs, these agencies seem to worry that these institutions do not conduct due diligence to the expected level. They have found the need to spell out risk management and oversight best practices. ⁶⁰

In this guidance, these agencies also worry about the impact on competition. They warn that these banking institutions need to evaluate how “strategic business arrangements (such as mergers, acquisitions, divestitures, partnerships, joint ventures, or joint marketing initiatives)” affect their activities. ⁶¹

The guidance also warns about carrying out due diligences of their service provider with competing banks. ⁶² This joint approach would affect competition because the banks who join forces to carry out due diligence would benefit through economies of scale: they would spread the costs of due diligence between them. These banks could refuse that other banks join in their due diligence efforts—effectively raising the relative costs for their competitors.

The guidance also discusses data aggregations. ⁶³ These aggregators raise their own competition concerns. A third-party data aggregator has the opportunity to gather data from multiple banks, which would not otherwise be able to do so. These data aggregators face the risk of acting as hubs where the banks act as spokes: these data aggregators must ensure that they do not use this aggregation to give these banks a competitive advantage that would otherwise be illegal.

The European Commission has already fined companies for facilitating a cartel. ⁶⁴ The next logical move is for the competition authorities to take a look at data aggregator and their role in cartelization. The European Commission has indicated that it may intervene in such situations. ⁶⁵ The next section dives into the relationship between competition and white labels.

A. Market Definition: White Labeling versus Branding

Brands affect our purchasing decisions of goods and services. When consumers purchase an airline ticket with a legacy airline, they expect a different service than when they purchase a ticket with a low-cost carrier. This section discusses the relationship between white labels and consumer expectations.

Faced with consumption decisions, consumers form a belief system about the probability of the quality of the product or service. Branding can transmit information about the service quality: branding allows consumers to correlate past with future consumption experience. ⁶⁷ Consumers can perform a less speculative cost–benefit analysis than they perform with generics.

Brand owners can capture some of the information cost savings: consumers are willing to pay more for branded goods to avoid information costs ⁶⁸ ; so, brand owners can charge higher prices to decrease information asymmetries. ⁶⁹ But white labels can blur the line between generics and branded services.

In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., ⁷⁰ the U.S. Supreme Court contrasted “true generics” which carry no brand against “private label generics” carrying the brand of the ultimate retailer. ⁷¹ As the U.S. Supreme Court noted: generics differ from “private label generic,” which this article refers to as white labeling. At the heart of this decision, the U.S. Supreme Court had to decide whether branded products and generic products compete—an exercise that will be repeated in many industries over the years. ⁷²

The necessity to investigate whether a generic or white label compete is inefficient given the jurisprudence. The U.S. Supreme Court should use a quick look rule approach that would not require plaintiffs to have to reprove that generics compete with branding in every case. This presumption would still allow the branded products to present counter evidence. ⁷³

According to this definition, generics are the absence of a brand. ⁷⁴ Because consumers cannot distinguish between generics, they perform a more speculative expected cost–benefit analysis than they would perform with branded products. ⁷⁵ White labels can however create confusions. White labeling amounts to the service provider rebranding the service as its own.

Some consumers may be aware of the re-labeling and consider it in their purchasing decision; but others will not realize that the ultimate seller affixed their brand onto of another service provider’s offering. ⁷⁶ Therefore, consumers may mistakenly associate a re-labeled service with an experience when the correlation between experience and brand breaks down. So, white labeling defeats much of what branding attempts to accomplish.

Branding and trademarks differ. ⁷⁷ All trademarks are brands; but not all brands are trademarks. The brand owner may decide not to protect its trademark, or the brand may not be protectable under trademark law. But their differences are not central to this article.

Trademarks have three main functions: (1) they disseminate information about the quality of the product; (2) they indicate the origin of the product; and (3) they protect the goodwill of its owners.

First, trademarks help consumers associate an experience or the quality of a product with a brand. Brands help differentiate products through quality. For example, in the United States, trademarks (and service marks) exist to promote fair competition. ⁷⁸ Trademarks improve information dissemination and reduce consumer search costs and confusion. ⁷⁹ To that effect, U.S. trademark law prohibits the registration of trademarks that aim “to cause confusion, or to cause mistake, or to deceive.” ⁸⁰

Second, trademarks also signal the origin of the product and help differentiate the products through its origin (instead of just its quality): trademarks keep producers accountable if a product fails to live to merchantability standards. For example, in the European Union, in Adam Opel v Autec, ⁸¹ the European Court of Justice (ECJ) had to decide whether replica toys displaying the Opel logo infringed on the Opel trademark. The ECJ held that the replica did not infringe if “the relevant public does not perceive the sign identical to the Opel logo . . . as an indication that those products come from Adam Opel.” ⁸² In other words, the ECJ ruled that trademark also functions as a marker of origin. Geographical indicators can perform that function on a broader scale (at the regional level instead of entity level). Some markers of origins can also evolve into a product themselves. For example, many luxury brands act as status symbols. ⁸³

Finally, trademarks also help decrease the negative impact on companies from others pretending to sell their products. They encourage brand holders to monitor the market for poor-quality pretenders. For example, in the United Kingdom, the common law passing-off and malicious falsehood causes of action preceded trademark laws but accomplished many of the same aims. ⁸⁴

White labeling affects all three functions of trademarks. First, if consumers are aware that the service is provided by contractors, they may no longer trust the trademarks. They may worry that even if the label remains the same, the experience or quality often differs when the supplier changes. Without more transparency, they may no longer trust the market. White labeling creates information asymmetries, and the consumers will fall back into evaluating their consumption decisions as they did with generics.

However, even if the quality is equivalent to the previous supplier (i.e., seller acting as quality control instead of service provider), white labeling affects the other functions of trademarks. A trademark cannot fulfill its origin function because the origin is not ascertainable. Some consumers assign utility and disutility with certain service providers. To avoid any disutility, the consumers now have to ensure that the service provider cannot delegate their duties. This non-delegation increases negotiation and transaction costs.

For example, some consumers may object to a company for moral or ethical reasons. But white labeling makes the supply chain opaque. This opacity can affect how consumers enjoy their goods or services. ⁸⁵ For example, many consumers object to Amazon’s business methods, its anti-tax lobbying, and the working conditions of their employees to the point that some have called for boycotts. ⁸⁶ However, these same consumers may not realize that many web-based service providers use Amazon services. ⁸⁷ More specifically, Netflix uses Amazon Web Services (AWS). ⁸⁸ While one might argue that what they do not know do not hurt them, consumers are unknowingly contributing to Amazon’s hegemony.

White labeling also affects goodwill and perceived reputation. When AWS suffered an outage, consumers blamed Netflix. ⁸⁹ Netflix can respond by switching its service provider; but the harm is already done: consumers already blame Netflix (instead of AWS). In the case of Netflix, the company has limited choice for their service providers. ⁹⁰

In this situation, the white label relationship creates a principal–agent problem. The B2B service providers control the quality whereas the business-to-consumer service seller faces the reputational impact. In other words, the service provider externalizes some costs of poor services onto the service seller. These externalities distort the incentives of white label service sellers and purchasers and affect the functioning of trademarks.

From a competition law standpoint, the branding of generic products (i.e., white labeling) is “an example of the power of brand advertising to bamboozle the public and thereby promote monopoly.” ⁹¹ These trademarks can create consumer deception and waste resources. ⁹²

In the case of Amazon, they have a further distorted incentive because they also compete with Netflix in the streaming service sector. This competition might incentivize them to prioritize reestablishing their Prime services after an outage.

In FinTech, Chetwood Financial follows a similar business model: they offer their banking services as white labels for others to affix their brand and they offer services direct to consumers. This position as service providers upstream and retail competitor downstream raises competition concerns discussed in the next section.

B. White Labels and Vertical Relationship

A FinTech company that operates both at the wholesale and at the retail levels raises some red flags. However, it is not uncommon for companies to change their business models and offerings.

First, if a vertically integrated company (that offered its own retail brand) introduced a white label wholesale service, such a company would cannibalize itself. ⁹³ This company would slow down its potential penetration in the downstream markets by making it easier for downstream retailers to compete. So, introducing a white label could reveal that the company gave up competing in the downstream market while its comparative advantage remains at the wholesale level.

Second, if a FinTech company started at the retail level and decided to start providing white label services at the wholesale level, this sequence of events can have diverging explanations. On one hand, some explanations can be competition neutral. For example, the company may have started at the retail level and may have been unable to enter the wholesale level because it lacked funds or the technology to operate at both levels. Many start-ups face budget constraint at the beginning of their lifecycle. ⁹⁴

On the other hand, some explanations may be rooted in an intent to decrease competition. For example, the retailer may create a wholesale entity to coordinate with its competitors at the retail level. This approach amounts to a hub-and-spoke with a horizontal element. The horizontal element could be viewed as an anticompetitive price fixing business model. ⁹⁵

Vertical business arrangements do not tend to raise as many issues as horizontal business arrangements. In 2022, the European Commission reiterated its vertical block exemptions to deal with e-commerce ⁹⁶ : vertical agreements that do not exceed 30 percent of the market ⁹⁷ and do not contain hardcore restrictions ⁹⁸ are exempt from antitrust scrutiny. It discusses “online intermediation” and classified them as vertical agreements—when these agreement “facilitate the initiation of direct transactions between undertakings, as well as those that facilitate the initiation of direct transactions between undertakings and final consumers.” ⁹⁹

The European Commission addressed what it refers to dual distributions “where a supplier sells goods or services not only at the upstream level but also at the downstream level, thereby competing with its independent distributors.” ¹⁰⁰ The Commission considers that these agreements without hardcore restriction would also fall under this exemption because “the competitive relationship between the supplier and the buyer at the downstream level is less important than the potential positive impact of the vertical agreement on competition in general at the upstream or downstream level.” ¹⁰¹

However, the Commission worries about the exchange of information because this dual distribution “may raise horizontal concerns” and the Commission limits the information that can be shared to the information necessary to the vertical agreement and to the improvement of the production or distribution of the services. ¹⁰² But, if the dual distributor is an online intermediary, then the exemption would not apply. ¹⁰³

Third, if a FinTech company started as a wholesale white label service provider before entering the retail market, this sequence of events can also raise some anticompetitive concerns. For example, a FinTech company may have decided to enter the retail market to price squeeze downstream players and increase its revenues over the long term. Price squeeze refers to a practice when “a vertically integrated firm sells inputs at wholesale and also sells finished goods or services at retail” and because of its market power in the input level, it increases input prices to reduce the profit margins of retail-level competitors. ¹⁰⁴

The U.S. Supreme Court has viewed price squeeze as combining two causes of actions. First, price squeeze can be viewed as a form of predatory pricing: the firm uses the input market profits to subsidize its predation in the retail market. ¹⁰⁵ Second, price squeeze can be viewed as a form of refusal to deal: the firm charges downstream competitors the retail price. ¹⁰⁶ The U.S. Supreme Court has rejected price squeeze as a valid antitrust cause of action. ¹⁰⁷ Many scholars agree with the U.S. Supreme Court’s decision. ¹⁰⁸

However, EU courts have viewed price squeeze as an abuse of dominant position. ¹⁰⁹ Price squeeze is referred as “margin squeeze” in the European Union. Margin squeeze occurs when

the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services to end-users. ¹¹⁰

The different approaches between the United States and the European Union could be attributed to different views on the responsibilities of entities with market powers against the limit of freedom of contracting. The debate about the two approaches rages on. ¹¹¹ A clear answer may not arise because different model parameters lead to different consumer welfare impacts. Deciphering the intent of a white labeler may be impossible; but context provides sufficient clues that they should trigger more scrutiny. Specifically, competition authority may pay more attention to how companies grew and developed instead of the current object and effect of their behavior. The next section focuses on another type of business model: the platform. Platforms are often combined with dual distribution as discussed next.

C. White Labels and Platforms

FinTech companies offer financial services relying on modern technologies to decrease transaction costs. These offerings take many forms, but two main trends have emerged: (1) FinTech relying on existing platforms like smartphones and (2) FinTech becoming platforms.

First, FinTech companies rely on technology like smartphones to delivery financial services. Websites, smartphones, and applications are platforms where consumers meet service providers—including FinTech. However, many FinTech companies use existing platforms like smartphone to offer their services. For example, Venmo is a social media-style peer-to-peer payment system funded in 2011 and acquired by PayPal, another FinTech, in 2013. ¹¹² Venmo has become a dominant player in the mobile payment application space in the United States. ¹¹³

For these FinTech to thrive, they require access to these platforms. However, established platforms may not want to grant them access. For example, the European Commission has sent a statement of objection to Apple over its Apple Pay practices. ¹¹⁴ Previous companies have complained about Apple and the openness of its iPhone technology to other companies. ¹¹⁵ These issues with access to platforms could explain why some companies have decided to opt to provide white label services instead of competing with incumbents.

What Apple allegedly carried out amounts to a refusal to deal under an essential facility theory of harm. Apple is the platform provider (iPhone) but it is also a competitor and FinTech through its Apple Pay application. The U.S. Supreme Court rejected this theory of harm in Verizon v. Trinko ¹¹⁶ because the court did not want to impose a duty to deal ¹¹⁷ —particularly when the industry is regulated. However, it is unclear whether the U.S. Supreme Court would view financial services regulated like telephone services. Instead of refusing access, these platforms could use different strategies (discussed in section III B) to impede competition.

By contrast, in the European Union, policymakers have been worried about the power of these platforms. The European Commission has created the concept of “gatekeeper” in the Digital Market Act. ¹¹⁸ A gatekeeper is any platform that (1) “has a significant impact on the internal market”; (2) “serves as an important gateway for business users to reach end users”; and (3) has “an entrenched and durable position” in the market. ¹¹⁹ The Digital Market Act provides more specific definitions and bestows on these gatekeepers duties toward market participants—including FinTech start-ups.

Based on cursory observations, companies like Apple (with its iPhone and Apple Store) and Google (with its Android Operating System and Google Play) would qualify as gatekeepers. Therefore, they would not be able to restrict access to their platforms without reasons. ¹²⁰ Under the Digital Market Act, Apple would have to grant access to FinTech companies to its platform or iPhone capabilities such as its payment system capabilities. ¹²¹

Second, many FinTech companies have adopted a platform model. Platform models vary almost as much as they are companies. For example, some FinTech like LendingClub ¹²² have adopted a matching platform model or “marketplace” model. ¹²³ On these kinds of platforms, supply meets demand: on LendingClub, fund providers meet fund demanders.

Other platforms like Visa, Master Card, and American Express may not have started as FinTech but compete with FinTech companies. In many respects, they are becoming FinTech companies themselves. These companies mainly function as payment platform ¹²⁴ where they match billing and paying needs.

Platforms have baffled many courts and challenged many established antitrust principles in general ¹²⁵ and in the FinTech industry in particular. For example, in Ohio v. American Express Co., ¹²⁶ the U.S. Supreme Court had to address two-sided payment platforms and decided that the product market was the payment services. The Court found that the plaintiffs failed to carry their burden of proof. In this case, the Court demonstrated a lack of understanding of the platform models. ¹²⁷

By contrast, the ECJ recognized three different product markets. In MasterCard and Others v European Commission, ¹²⁸ the European Commission argued that three markets existed: (1) upstream market for the business of banks; (2) downstream market for the business of card holders; and (3) downstream market for the business of merchants. ¹²⁹ The European Commission rejected the American Express approach that only one market existed. ¹³⁰ The ECJ agreed ¹³¹ and found that MasterCard abused its dominant position. ¹³²

The U.S. approach focuses on an ex-post approach to card issuance, whereas the EU approach uses an ex-ante approach view to these platforms. The EU approach is more complete and in line with rational behavior that the U.S. Supreme Court has repeatedly embraced where ex-post actions affect ex-ante behavior. According to rational expectation theory, individuals form rational expectations about the future based on perfect information. ¹³³ Thus, payment service platform clients ought to know how much each service they use costs, and this cost affects which card they obtain.

However, if information is partial, then the theory breaks down. Instead, when an individual gathers new information, they change their expectations. So, if a client does not have the most optimal card to make a purchase in a store because of imperfect information (e.g., learns about card fees), they can return to the card market to obtain the optimal card before they need to make another payment.

The U.S. approach has many problems. Viewing platforms as “one market for transaction” fails to recognize that clients have repeated interactions with their payment service providers and merchants and that individuals learn by doing. The U.S. approach is not more (judicially) efficient because the parties still have to present evidence about which market they would believe the platforms are operating.

Similarly, the EU approach, while more complete, fails to consider that payment service uses multi-home, ¹³⁴ that is “many merchants accept both American Express and Visa; furthermore, some consumers have both Amex and Visa cards in their pockets.” ¹³⁵ Thus, another market exists at the transaction level, which allows the car user to decide based on the situation which card is more optimal.

The U.S. and EU competition authorities (and scholars) are learning everyday about new business models. The courts should embrace the challenge instead of trying to retrofit old rules to new business models. FinTech companies have been innovating constantly and the use of white label platform will challenge established theories. The competition authorities should ensure that this innovation is protected. ¹³⁶ The next section discusses how white labels can enhance innovation.

D. White Labels and Innovation

White labels may have helped FinTech innovations through taskification and vertical disintegration. Vertical (dis)integration and competition have a U-shaped relationship: more vertical integration occurs at opposite end of the competition spectrum. ¹³⁷ So, taskification and white labeling could be correlated with the middle of the competition spectrum. And this middle of the spectrum is correlated with more innovations. Competition and innovation also have a U-shaped relationship: ¹³⁸ less innovation occurs at opposite end of the competition spectrum. In other words, vertical disintegration that comes with white labels ¹³⁹ could benefit consumers in the long run through more innovation.

Legislators and regulators have had many conversations about the need to foster innovation through competition laws; ¹⁴⁰ but little has been done. The FinTech ecosystem has led to many innovations but remains fragile. White labeling could improve the likelihood of seeing innovations.

White label and FinTech innovations can help the competition laws by removing the need for certain exemptions. For example, the insurance industry suffers from many market failures including information asymmetries. In the United States, insurance companies are exempt from Federal antitrust laws ¹⁴¹ under the McCarran-Ferguson Act. ¹⁴² Based on this exemption, insurance companies were able to share information. This information sharing could have benefited consumers because no insurance companies had enough information (at the time) to efficiently price their insurance products. ¹⁴³

A modern FinTech company decreases the need to have such exemptions. These companies have access to big data and can calculate the probably of accident without having to information-share. They can also use white labeling to increase their economies of scale and gather that information on their own. For example, Insuritas is a consumer facing white label insurance company founded in 1999. ¹⁴⁴ Insuritas is an innovative insurance FinTech. ¹⁴⁵ Insuritas has allowed banks like Incommons Banks to offer insurance services to their clients. ¹⁴⁶ Insuritas provides the insurance products and the banks use their network of customers to sell the product. Insuritas can use the information it gains from a broader pool of insured than it would have otherwise in the insurance market to ensure products are price properly.

Through white labeling, this insurance company may gain a critical mass of information to price its product in a competitive manner and to have enough clients to spread the cost of insurance over the pool of clients. The insurance company may even enter the retail market once ready. So white labeling might help competition policy in this case ¹⁴⁷ and make the insurance exemption unnecessary. The next section discusses how competition authority should ensure that innovation and white labels reach their potential and delivery on the promises of FinTech.

E. White Labels and Merger Control

White labeling gives merging parties an opportunity to circumvent merger notification. Most jurisdictions have implemented one of two kinds of threshold: (1) a turnover threshold and (2) a value threshold. First, the European Commission uses a turnover threshold: if the merging entities have a combined turnover of over €5 billion and an EU-wide turnover for at least two of the firms over €250 million each, then they must notify the European Commission of their impending merger. ¹⁴⁸

Through regulatory arbitrage, companies can structure their organization to fall below these thresholds. For example, Uber classifies its drivers as independent contractors. This classification allows companies like Uber to avoid labor regulation (e.g., paid leave). However, it also allows companies like Uber to avoid some competition laws regulation. For example, when Didi and Uber merged in China, they did not report the merger because it allegedly fell below the reporting threshold: ¹⁴⁹ the revenues of both companies were hard to identify because of the subsidies and because it was unclear whether the passenger-to-driver transaction should be part of Uber’s revenue. ¹⁵⁰ In other words, outsourcing makes calculating turnover ratios difficult. ¹⁵¹

White labeling can also be used to structure a company so as to decrease its turnover value. If each task is carried out by a different entity, then each entity will have a relatively smaller turnover (as compared with the value of the full supply chain). For example, CurrencyCloud provides its services to banks and other financial institutions making international payments. ¹⁵² CurrencyCloud had reported turnover of around £27 million in 2019 and £36 million in 2020. ¹⁵³ Thus, the 2021 merger with Visa would fall outside the EU merger review threshold. ¹⁵⁴

However, because Visa acquired CurrencyCloud for £700 million, ¹⁵⁵ this acquisition would have triggered a merger review in the United States. In the United States, the requirement is linked to the value of the asset acquired—not to the turnover of the companies. If entities acquire another’s assets (through a merger or acquisition) above the regulatory thresholds, these entities must notify the authority before consummating the transaction. In 2022, the U.S. threshold increased from $92 million to $101 million. ¹⁵⁶

This threshold explains how the Department of Justice was notified and opposed Visa’s acquisition of Plaid “an innovative and nascent competitor.” ¹⁵⁷ Visa wanted to acquire Plaid on “strategic, not financial” grounds because Visa viewed Plaid as a future potential competitor. ¹⁵⁸ This kind of mergers has been referred as killer acquisition. ¹⁵⁹

The issue of “killer acquisition” (or “catch-and-kill”) is not unique to FinTech. ¹⁶⁰ Many start-ups are acquired before they can become a competitor to the incumbent. The digital space is littered with such examples. For example, the UK Competition Market Authority ordered an ex-post analysis of some merger decisions. ¹⁶¹ The review found that “[t]he decisions taken in Facebook/Instagram and Google/Waze may have represented missed opportunities for the emergence of challengers to the market incumbents but have also likely resulted in efficiencies.” ¹⁶²

Plaid’s turnover would not have triggered a notification to the European Commission. ¹⁶³ But Plaid was turning an “essential” white label service provider:

Plaid already supports over 2,600 fintech apps, including 80% of the largest such apps in the United States, and has a network of more than 11,000 U.S. financial institutions. Plaid also connects to over 200 million consumer bank accounts through its existing services. ¹⁶⁴

If Plaid were to be acquired, it would have devasting effects on the competitive landscape in the payment industry. The services that Plaid, a FinTech itself, provides are white label services to FinTech companies like Wise and Venmo. ¹⁶⁵

Both threshold approaches have some benefits. If the competition authorities had to rely on a sole test, the value threshold test may be preferable when dealing with FinTech and other innovative companies who can act as rise to the potential of competitors to established incumbents.

For many years, merger control focused on “static” competition. One view of merger control is that at best it can only maintain the status quo. The review threshold in Europe reflects that view because it focuses on how large the companies are at the time of merger.

The value threshold reflects a “dynamic” competition. Merger valuation usually transfers some of the (expected) gains from the acquirer to the acquiree: the larger the deals, the larger the (expected) gains and the more the acquiring company expects to extract from consumers. ¹⁶⁶ In some cases, this extraction comes from new offering; but in other cases, it comes from consumer surplus being transferred. If the competition authorities worry about foreclosing future competition, the value threshold will be superior in most cases to the turnover threshold.

Although it does not have the history of other tech giants, ¹⁶⁷ Visa has invested or acquired many start-ups. ¹⁶⁸ These investments demonstrate either an inability to innovate internally or a desire to stifle competition before they occur. Either way, this approach needs more scrutiny.