US competition law issues for FinTechs

June 2022 | EXPERT BRIEFING | COMPETITION & ANTITRUST

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Across a wide spectrum of industries, antitrust demands more mindshare from executives and in-house counsel than ever before. This is especially true in the FinTech space, where energised antitrust enforcement, continued federal, state and private focus on technology industries, and potentially imminent shifts in antitrust regulation of financial services are creating unique levels of risk. This article highlights one significant area of antitrust risk – impediments to M&A – and suggests strategies for FinTech leaders to consider in managing that risk.

Regulatory background

For starters, it is important to understand the context giving rise to this unique risk environment. The Biden administration has made antitrust enforcement in financial services a central priority. On 9 July 2021, president Biden issued an Executive Order aimed at promoting competition in the US economy. The Executive Order identifies several dozen initiatives for multiple agencies to undertake, but specifically tasks the Treasury department with developing a report “assessing the effects on competition of large technology firms’ and other non-bank, i.e., FinTech companies, entry into consumer finance markets”. That report may very well lay the groundwork for increased regulation in this space for the remainder of the Biden presidency.

President Biden’s selections of leaders for the antitrust agencies also signals regulatory change and risk for FinTech companies. Lina Kahn made her name as a law student advocating for aggressive antitrust reform, particularly in the technology sector. Now, as chairperson of the Federal Trade Commission (FTC), she is actively pressing for greater oversight of technology companies in the financial sector.

For example, in a letter to the director of the Consumer Financial Protection Bureau (CFPB), Ms Khan voiced concern about the potential for data gathering and analysis by technology companies to suppress competition in payments and financial services. Jonathan Kanter, head of the Antitrust Division at the Department of Justice (DOJ), indicated that he intends for the Division to sue to block cases rather than work with merging parties to remedy agency concerns. That policy’s potential to derail FinTech deals was heightened when the DOJ consolidated responsibilities for reviewing conduct and mergers in the credit card, debit card and banking spaces into a new ‘Financial services, Fintech and Banking’ section.

The DOJ already was leaning in to the FinTech space before Mr Kanter was nominated. The Antitrust Division secured more than three dozen criminal convictions and billions of dollars in criminal fines for bid rigging and market manipulation in the financial services sector. It has continued to pay particular attention in financial services mergers to the role of new market entrants and potentially disruptive technologies. The Division recently completed its collection of comments on its guidelines for analysing mergers in the banking sector, and a revision of those guidelines may be forthcoming.

The increased uncertainty for FinTech mergers and stakeholders is compounded by unprecedented hostility toward technology companies. Legislation, including the American Innovation and Choice Online Act and the sweeping Prohibiting Anticompetitive Mergers Act, would fundamentally change the antitrust landscape, if passed. Sprawling investigations of leading technology companies continue unabated. And private plaintiff lawsuits against technology companies are rapidly increasing.

This historic confluence of factors creates unique risk for M&A in the FinTech space.

Impediments to M&A in the FinTech space

Two of the most significant antitrust hurdles to FinTech transactions are agency opposition to acquisitions of future competitors and agencies moving the analytical goalposts on which the business community has relied for decades.

When a more established financial services player is acquiring a technology company, antitrust agencies can be expected to expend significant energy in the merger review evaluating whether the target would otherwise develop into a competitor for the acquirer. Although analysing the effects of mergers on potential competition is not a new antitrust consideration, the agencies’ apparent willingness to see potential competition where prior enforcement teams would not is new.

Mr Kanter recently described this expansion of the enforcement aperture: “As enforcers, if we focus only on acquisitions of firms already set to enter a market, we miss acquisitions that allow digital platforms to strengthen their moats through innovation. We should acknowledge that nascent competitor acquisitions do not have to be purely horizontal or vertical – in digital markets, a nascent competitive threat can offer any novel or differentiated product in an adjacent market.”

Under this logic, regulators could seek to block acquisitions without demonstrating even perceived competitive effect, potentially cutting off FinTech start-ups from critical industry investment.

Seeing potential competition where none exists is just one way the agencies are moving the analytical goalposts. For decades the principle of exclusion has informed vertical merger analysis. No longer, according to Ms Khan: “Business strategies that digital markets reward require us to look beyond concepts like foreclosure and exclusion when trying to cognise harm, especially in the context of merger investigations. For example, when a dominant platform pursues an acquisition as a way to overtake emerging rivals in still-nascent markets, foreclosure may not be a likely tactic. Instead of cutting off access, the strategy requires swift integration and rapid scaling of the acquired product so that the firm can quickly establish a strong foothold. The deal can still facilitate the maintenance of a monopoly – and therefore be illegal – but the precise mechanism may look different from some of the traditional concepts that antitrust enforcers look to.”

This suggests a potential antitrust violation where a larger industry player plans to invest in scale and growth of a target – a strategy that often benefits consumers and acquireds. Vertical acquisitions that involve FinTech and market infrastructure providers can therefore be expected to receive extended, costly merger reviews, notwithstanding limited evidence of exclusion.

Strategies for managing risk

Strategic FinTech stakeholders can manage these antitrust risks through a combination of awareness and intentionality around compliance, including document creation.

FinTech deal makers need to become sensitised to the agencies’ focus areas so that the transaction, sales or other teams do not inadvertently create evidence that regulators can use to torpedo deals. In constructing documents on deal rationale, for example, blinkered perspectives about valuation support can lead to content that is counterproductive, if not fatal, in antitrust merger review. Consider a discussion of a ‘competitive moat’ built by bolt-on acquisitions, or a long-term strategic plan that contains aspirational but, unlikely to be realised, adjacent market expansion scenarios.

Such comments can play directly into the regulators’ more expansive narrative of potential competition and could become exhibits highlighted in agency staff’s case for blocking a deal. Providing early and ongoing guidance to all the teams whose documents are likely to be analysed by the antitrust enforcers is therefore critical.

Compliance should not stop with internal teams, either. Investors, prospective deal partners, financial advisers and other consultants to the dealmaking process need to be as thoughtful about document creation as internal stakeholders. Prospective buyers and sellers in the FinTech space need to demand that discipline from potential partners and advisers. Tapping into experienced deal counsel early in the process can help both internal and external teams by providing clear, easily-implemented antitrust guardrails.

FinTech deal makers likewise need to strategically manage external messaging. During antitrust merger review, agency staff routinely collect and analyse public statements and materials regarding transactions. As a result, external content must reflect the pro-competitive benefits of the transaction and steer clear of agency narratives of competitive harms. Ensuring that team members tasked with public-facing content creation are dialled into the antitrust strategy is vital.

Understanding the role customers play in the agencies’ merger review is also essential. Early in a deal investigation, staff will reach out directly to customers. Before those contacts occur, leadership and sales personnel need to engage in dialogue with key customers around the benefits of the transaction, especially because the window for addressing customer concerns before they voice them to the government closes quickly.

Finally, it is important to understand that compliance can be improved at any step in the process. Yes, it is best practice to develop a clear-eyed view of the risk before embarking on a deal, and to drive compliance to reduce that risk, including by deal partners and investors, from day one. But assessing deal documents, analysing antitrust risk in light of existing and emerging agency priorities, and improving document hygiene can be implemented to good effect even once the transaction is underway. FinTech players actively working toward exit or investment strategies therefore will benefit from focusing on and raising their antitrust game, no matter where they are in their deal.

Nick Gaglio and Denise Plunkett are partners at Axinn, Veltrop & Harkrider LLP. Mr Gaglio can be contacted on +1 (212) 728 2228 or by email: ngaglio@axinn.com. Ms Plunkett can be contacted on +1 (212) 728 2231 or by email: dplunkett@axinn.com.

Nick Gaglio and Denise Plunkett

Axinn, Veltrop & Harkrider LLP