[Sourav Paul is a 3rd Year B.A. LL. B (Hons.) student at the National University of Juridical Sciences, Kolkata]
Rapid technological innovations are changing the fundamentals of the retail financial markets, thereby opening up a new frontier for competition in the industry. The harbingers of the radical changes in the retail banking segment are fintech start-ups, who are deploying innovative technologies to cater to the emerging needs of a customer. In the United States, they are even creating novel customer demands by enabling new banking applications and services, for instance, blockchain services, crowd-lending, and the like. The innovation-centric approach of fintech start-ups is creating competitive pressure on the incumbent banks, who now need to become innovative, agile, and digital in order to stay in the market. The global fintech market is projected to grow at a compound annual rate of 25.18% over the forecast period 2022-2027. Therefore, fintech start-ups are expected to play a pivotal role in the retail financial markets.
However, fintech start-ups are disadvantaged due to the lack of access to customer transaction data, one of the entry barriers faced by new entrants in the retail financial sector. In order to lower this entry barrier and ensure a level playing field in the market, one observes the rise in the implementation of “open banking” principles across jurisdictions. Open banking has been defined as “a new kind of business ecosystem characterized by the widespread use of data-enabled services to deliver innovative and more competitive services to consumers.” At its core, it attempts to shift a financial institution’s objective from aggressive data accumulation towards creating innovative products with the aid of accumulated data. Thus, one of the core pillars of open banking is to facilitate data sharing and portability in order to encourage competition.
Over the past decade, antitrust regulators across jurisdictions have implemented open banking principles by mandating data portability requirements on traditional banks. However, this might lay down the foundation for Big Tech’s entry in the retail financial markets. This is because they would be categorised as ‘new entrants’ and would be able to avail the benefits the data portability initiatives. Big Tech can easily monopolise the retail financial markets due to easy availability of customer transaction data. As a response to the apprehension of Big Tech’s potential entry in retail financial markets and its existing gatekeeper status, policymakers have proposed varied measures ranging from a blanket ban on Big Tech from accessing retail financial markets to taking away its incentives to expand in newer sectors.
The post seeks to highlight the inherent paradox in the two sets of regulatory proposals. It intends to establish that implementation of the open banking principle invites Big Tech’s entry into the retail financial markets. On the other hand, in the long run, a complete ban on Big Tech’s entry into the retail financial markets may be detrimental for competition, considering the increasing traditional bank-fintech start-up collaborations.
Tracing the Regulatory Wave of Open Banking Strategies
In 2015, the European Union adopted Directive 2366/2015 on payment services to promote innovation and safeguard consumer rights in the digital banking space. The underlying intention was to enhance consumers’ bargaining power by giving them control over their financial data. Also, it laid down the foundations for open banking since it introduced the Access to Account rule (‘X2SA’). The X2SA rule mandates that traditional banks provide secure and controlled access to third-party providers through application programming interfaces (‘API’), who are new entrants in the banking sector. In essence, the rule forces the traditional banks to share customers’ transaction data with the new fintech entrants, provided the customer has given explicit consent. Considering the centrality of data in business operations of the fintech start-ups, the X2SA rule enables smooth data flow and interoperability within the financial ecosystem, thereby reducing the switching costs for a consumer.
In 2017, the Competition and Markets Authority (‘CMA’) carried out an investigation into United Kingdom’s retail banking sector and issued the Retail Banking Market Investigation Order, 2017 (‘Order’). The Order introduced the UK open banking remedy that mandated that nine major British Banks or CMA9 (Lloyds, Barclays, Nationwide, RBS, Santander, Danske Bank, HSBC, Allied Irish Banks, and Bank of Ireland) must share customers’ bank and credit card transaction data with third parties. Currently, it covers more than 330 regulated financial firms and 230 third parties who access customer transaction data from these firms. The move was motivated to promote innovative payment services and create a level-playing field for fintech start-ups in the retail financial market. One of the key pillars of the future governance of open banking in the United Kingdom is competition and innovation, as identified by the CMA.
In 2017, the Australian Government launched the Consumer Data Right project (‘CDR’), an initiative to frame rules for a sector-specific data portability right, with the intention to “encourage competition between service providers, leading not only to better prices for customers but also more innovative products and services.” The objective of CDR is to provide individuals and businesses with a right to access and use the information on a consumer, accumulated by data holders. Similar to CMA’s approach, the Australian Competition and Consumer Commission enacted the Competition and Consumer (Consumer Data Right) Rules, 2020, which impose an obligation on four major banks (ANZ, Westpac, Commonwealth Bank, and NAB) to share customer data pertaining to credit and debit cards, deposit accounts, and transaction amounts, mortgage, and personal loan data with authorised third parties.
In 2018, the Japanese Banking Act, 1981 was amended to introduce open banking policies. Although in the initial stages of development, 20 Japanese financial institutions use APIs to enable access to customer data by authorised third parties. The Monetary Authority of Singapore launched the API Exchange in 2018, the world’s first cross-border, open-architecture platform, thereby laying down the foundation of open banking and promoting innovation and competition in the banking sector. In essence, all the above mentioned regulatory interventions had a pro-competitive rationale i.e., promoting access to data by imposing data portability requirements on the incumbent banks.
Analysing the Unintended Consequence of Data Portability Measures
Policymakers across jurisdictions are laying the pillars of open banking in retail financial markets, thereby creating an ecosystem characterised by increased interoperability between financial institutions and frictionless data flows. However, an unintended consequence of these frameworks that hinges on data portability is that they can pave the entry of Big Tech in the retail financial market. Big Tech platforms have access to the capital markets, large customer bases, and enjoy brand recognition. They also have access to advanced technologies, for instance, artificial intelligence and cloud computing, that can be deployed to process customers’ transaction data more efficiently. Thus, the scalability potential of Big Tech in retail financial markets is massive. On the other hand, fintech start-ups struggle in terms of compliance costs, lack reputation in the retail financial markets, and have limited access to information regarding their potential customer base. Therefore, in light of the abovementioned reasons, Big Tech’s entry into the retail financial markets poses a competitive threat to fintech start-ups.
The Big Tech’s entry may also have an adverse impact on the financial stability of the financial markets. If the financial markets become concentrated similar to the digital markets, any regulatory action against the Big Tech’s financial arm would have a debilitating effect on the entire financial market. Any enforcement action would leave customers unable to make payments or access services, thereby undermining their confidence in the financial system. Further, increased digitisation of financial transactions raises the risks of discrimination of vulnerable communities. The Big Tech can engage in self-preferencing or tie new financial products with their existing services in digital markets. Thus, it can simply replicate its anti-competitive strategies in the financial markets.
It is imperative to note that if the data portability requirements are not narrowly-tailored, there is a possibility of a ‘regulatory backfire’, thereby providing incentives and leverage to the Big Tech to enter into the financial markets. This scenario resulted in new sets of further regulatory interventions, which are discussed in the following segment.
Analysing the Regulatory Proposals to Curb Big Tech’s Entry into Retail Financial Markets
To curtail Big Tech’s entry into retail financial markets, some scholars propose a ‘reciprocity obligation’ between Big Techs and traditional banks, i.e., if the X2SA rule mandates the bank to share data with a Big Tech platform, the bank must also have a corresponding right to access Big Tech’s data in order to supplement its digital services. Further, commentators have raised the concern that the X2SA rule is not narrowly-tailored and disproportionate for fintech start-ups and Big Tech platforms. This proposal finds mention in article 6(f) of the Digital Markets Act (‘DMA’) that imposes an ex ante obligation on the gatekeepers to “allow business users and providers of ancillary services access to and interoperability with the same operating system, hardware or software features […].” The legislative intent of the provision can be found in recital 14 of the DMA, noting that gatekeepers tend to offer ancillary services like payment services along with their core services. It further highlights that they often use their ‘gatekeeper power’ to reduce choices in the new markets and drive out competition.
Section 19a of the German Act Against Restraints of Competition empowers the Bundeskartellamt to take action against an “undertaking for competition across markets” if the undertaking intends to expand in sectors wherein “its access to data [is] relevant for competition” unless there are compelling efficiency justifications. This approach essentially takes away the incentives of Big Tech to expand into newer markets by imposing additional regulatory compliances.
A blanket ban approach has been adopted in the United States, with the introduction of the Keep Big Tech out of Finance Bill (‘Bill’). The Bill proposes to bar Big Tech platforms with annual revenue of USD 25 billion from offering financial services or acting as a financial institution. The Bill was introduced as a response to, inter-alia, the Libra project of Facebook (now Meta). It also proposes a fine of USD 1 million per day for violation of provisions.
The underlying theme of all these regulatory frameworks is to protect traditional banks and fintech start-ups from the competitive pressure of the Big Tech platforms. However, this raises another concern: what happens when the large traditional banks and fintech start-ups integrate and cooperate with each other in the retail financial market segment? The objective of the X2SA rule, the UK open banking remedy, and similar arrangements, was to dismantle the privileged position of the incumbent banks since they enjoy the ‘gatekeeper power’ in retail financial markets. Recent scholarship suggests that fintech start-ups and incumbent banks are more likely to cooperate and complement each other. The traditional banks intend to capitalise on the technology-driven innovations introduced by the fintech start-ups. Further, due to low internal bureaucracy, and short development cycles in the fintech start-ups, the traditional banks intend to partner with them. It is also in the best interests of the fintech platforms to partner with incumbent banks since they need to offer a bundle of services in order to expand. In the long run, if there is full-fledged cooperation between fintech start-ups and incumbent banks, it would have a detrimental impact on innovation pertaining to new products and services. These collaborations may drive out small local banks and new fintech start-ups who are unable to partner with an incumbent bank. Therefore, barring the entry of Big Tech into the retail financial segment may curtail the only way of imposing effective competitive pressure on incumbent banks and fintech start-ups.
Conclusion
This post is a modest attempt to unpack the complex regulatory paradoxes that exist in the retail financial markets due to the introduction of data portability requirements that have been imposed as a part of the broad open banking agenda. It highlighted that the global trend of implementing data portability measures might increase incentives for Big Tech’s entry into the retail financial markets, thereby raising competition concerns. It also examined the probable detrimental consequences of barring the entry of Big Tech into financial markets in light of the close collaborations between fintech start-ups and traditional banks. It is important not to lose sight of the fact that, at this juncture, it is difficult to predict who will disrupt and how they will disrupt the retail financial market in the future. Nevertheless, the antitrust regulators are expected to develop regulatory policies to solve the inherent paradoxes and ensure fair competition in the retail financial markets.
– Sourav Paul