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Digital banking 13 Sep 2019

Digital economy: towards cross-border and intersectoral coordination

Large technology companies, or bigtech, have a large customer base, access to a massive volume of data and financial strength. While banks also have some of these attributes, it is the network effect technologies that companies benefit from that could ultimately undermine data-fueled innovation that is causing regulators and businesses alike concern. According to Santiago Fernández de Lis, the Head of Regulation at BBVA, if we want to ensure the continued growth, innovation and sustainability of the digital economy, we need to shift our approach to regulation from a national, sectoral approach to a truly cross-border and intersectoral approach.

On September 12th, Santiago Fernández de Lis attended the Eurofi Financial Forum in Helsinki, participating in a panel on the opportunities, challenges and regulatory implications of digitization for the European financial sector.

In his presentation, Fernández de Lis indicated that for now, bigtech - joining the financial sector has been limited in most markets, with the exception of China. Although some bigtech firms are currently skirting around the edges of the financial services sector - especially in areas like payments - these behemoths fully joining the financial services business could therefore have a profound impact on the sector. Nevertheless, financial authorities have started to debate the potential impact these companies could have on market composition, competitive dynamics and financial stability.

According to Fernández de Lis, financial authorities’ concerns are related to the recognition that bigtech companies have a competitive advantage over banks and fintech firms because of both their network effect scale, access to data and a less stringent financial regulatory oversight. Their involvement in the sector - given their giant customer bases and deep pockets could result in rapid and profound change in financial markets.

On the one hand, bigtech could interact with the financial industry by acting as service providers for things like cloud computing, data or artificial intelligence. On the other, they could offer financial services directly to the end customer, either in collaboration with financial institutions, like Apple Pay, or on their own, outside of existing infrastructure, like Facebook’s Libra.

Fernández de Lis noted that if these companies are successful in joining the financial services industry, it could give way to new systemic financial services providers or critical infrastructure for the market, or it could increase the volatility of deposits and limit the banking sector’s ability to afford to innovate itself - especially at the fintech level.

A new coordination mechanism under the auspices of the G20 is needed to deal with the cross-cutting digital issues

Ultimately, this process could lead to the reconfiguration of the financial system, although this will depend on the rules of the game for banks and non-financial companies. In this scenario, financial authorities will have to manage the financial stability risks associated with this reconfiguration, in addition to the risks that emerge in this new environment of increased concentration.

Digital markets are inherently difficult to keep within borders and sectors. Thus, for the BBVA executive, in the current competitive landscape, we must evolve from responses on a sectoral and national level, to cross-border and intersectorial responses. In the absence of this coordination, different national approaches and the outdated notion of markets and sectors will result in regulatory arbitration practices, hinder cross-border trade of digital goods and services and undermine the benefits of the digital age for everyone. The problem is that many of the aforementioned challenges extend well beyond the financial sector, and thus the remit of existing international institutions. Therefore, a new coordination mechanism under the auspices of the G20 is needed to deal with the cross-cutting digital issues.

In his opinion, this cross-border and intersectoral coordination is especially necessary within the European Union in order to move toward a truly integrated single market.

Santiago Fernández de Lis, Head of Regulation at BBVA.

Asymmetric access to data

In his presentation, Santiago Fernández de Lis mentioned that data is the backbone of the digital economy. Regulation focuses on protecting user data through the European Union’s General Data Protection Regulation (GPDR), for example. These regulations include users’ rights to data portability, but the European Union has stressed the need to expand rights to include data sharing and the creation of mechanisms for this purpose.

Fernández de Lis underscored that the opportunities to share data are much more effective in the open banking field. For example, since September 2019, banks are forced to provide users the possibility of sharing their payment data with third parties through APIs. This creates data asymmetry: financial companies must provide easy access in real time to standardized payment data, but data from other sectors is not available in similar terms. The financial sector is at a disadvantage in providing digital financial services.

For the BBVA executive, the logic of open banking can be applied to all sectors in order to create a comprehensive framework for data exchange fomented by users. This way, all large companies from all sectors that operate online would allow users to share their data on APIs with whomever they want, in a timely and uniform way. This would break down the existing data silos and give control back to users, helping to promote the next generation of digital innovation.