Europe should not insulate big banks from fintech competition

Oscar Borgogno - University of Turin and Bank of Italy;

Giuseppe Colangelo - University of Basilicata and Stanford Law School

-- In its recent Communication on a European strategy for data, the European Commission announced a legislative measure (the Data Act) to provide incentives for horizontal data sharing across sectors. The forthcoming act will represent a further regulatory intervention by European institutions on major data-related issues. However, several studies question the effectiveness of data portability in fostering market competition. For instance, by harnessing the massive quantities of data generated by their networks and benefiting from access to payment and account information enabled by the EU Payment Service Directive (PSD2), large technology companies may disrupt retail banking markets. The fear is that BigTech platforms, following the “move fast and break things” motto, could rapidly monopolize the market for financial services by combining different types of financial and non-financial services, and engaging in self-preferencing, i.e. giving preferential treatment to their own products and services compared to those provided by incumbents and start-ups.

Against this background, the Expert Group on Regulatory Obstacles to Financial Innovation set up by the European Commission has recommended the introduction of ex ante rules to prevent large, vertically integrated platforms from discriminating against product and service provision by third parties. This recommendation is in line with other and more general reform proposals aimed at providing greater control on practices and business models of gatekeeping online platforms. Furthermore, questioning whether a one-size-fits-all data access rule is well-suited and proportionate for both startups and BigTechs, some incumbents and commentators propose to complement this rule with a reciprocity obligation between BigTechs and banks: if the beneficiary is a large digital company, the data access rule should be integrated with a corresponding right of the bank to access BigTech data that may equally be used to enhance digital payment services.

In our most recent paper, “The data sharing paradox: BigTechs in finance”, we argue that crafting an ex ante regulation tailored to platform-based technology companies could be counterproductive and at odds with the pro-competitive aim of the PSD2. Indeed, in the banking sector, gatekeepers are represented by financial institutions, rather than BigTechs. As FinTech start-ups seem more likely to work alongside incumbent banks rather than compete with them, imposing entry barriers to BigTechs may remove the only effective source of competitive pressure for traditional, big banks.

First, innovations and efficiencies that platforms are likely to bring into the financial system would be jeopardized, thereby preventing the release of new products and services beneficial to consumers (in terms of financial inclusion, customer experience, better management of monetary resources, etc.). Indeed, such a form of regulation would asymmetrically target specific entities, thereby subjecting them to a non-neutral regulatory scrutiny.

Second, and most importantly, large incumbent banks would be in a privileged position because they would be protected from BigTechs’ potential competition, but still free to harness FinTech-enabled solutions to drive small local banks unable to bear the cost of the Open Banking transition out of the market. Hence, somewhat paradoxically, early ex ante regulatory measures specifically imposed on BigTechs could end up frustrating the pro-competitive aim of the PSD2.

Indeed, as FinTech start-ups seem more likely to work alongside incumbent banks rather than compete with them, limiting the entry of BigTechs may remove the only effective source of competitive pressure of small against big banks - to the detriment of competition and consumers.

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