Fintechs and major tech corporations have started rolling out new financial services that have the potential to severely disrupt the financial sector. BBVA Research has just published “Digital Transformation and Competition in the Financial Sector,” a working paper that analyzes the regulatory challenges emerging in this new scenario to guarantee that customers can reap the benefits enabled by new technologies while ensuring fair competition conditions in an increasingly diverse ecosystem.
The digitization of financial services enabled by the widespread adoption of smart devices, cloud computing and data accessibility and usability has brought the industry to the brink of disruption, and reshaped the competitive landscape, making it easier than ever for new entrants to break into certain financial services niches. Thus, new fintechs or emerging companies have started competing for specific financial services niches, while large technology companies have began expanding their digital ecosystems to encompass new financial services.
For the financial services industry, due to the size of these large tech companies and the characteristics of their digital ecosystems —decentralized production, powerful links to related markets and a global distribution of products and services— this expansion has the potential to become a real game changer.
However, its actual impact is hard to predict. On the one hand, new players are expected to focus on marketing and distributing financial products, and not so much on activities in more heavily regulated areas —such as the collection of deposits — but, on the other, “the final extent of this expansion is uncertain and is, in part, dependent on the regulatory and competition policy framework,” argues the report.
In any case, integrating financial services into digital ecosystems that can potentially grow to establish dominant positions within their target markets poses significant challenges in terms of financial stability, competition and consumer protection. That is why BBVA Research considers that financial regulatory and supervisory authorities need to keep a close eye on market trends, identifying emerging risks and fine tuning the regulatory framework accordingly.
In this sense, the working paper echoes one of the top demands from financial institutions: the need to define a regulatory framework based more on activities and risks than on the type of institution undertaking them.
One of the most pressing regulatory issues that authorities face is defining domestic policies that are capable of addressing the challenges posed by truly global companies and ecosystems. Reality has shown that, for domestic authorities, the task of regulating and controlling online services, unbound by national borders, can be extremely daunting. This is why the international community should consider the need to create a forum —perhaps under the sponsored by the G20— that fosters coordination on privacy and competition matters, to prevent global imbalances from building up.
Also, BBVA Research’s paper argues that encouraging fair competition, requires reciprocal data portability and access regulations, to avoid asymmetries between the different types of players in the market. Thus, for instance, banks and digital companies should be subject to comparable regulations, in a way such that they do not foster the concentration of huge amounts of data in a few players, something that can yield a vital competitive advantage.
Data protection authorities should also remain particularly vigilant to preserve user rights, while competition authorities should focus on preventing dominant companies from leveraging their position to restrict competition.
Europe’s effort in this regard have been groundbreaking, reflective of a very strong determination to protect user rights. The new General Data Protection Regulation (GDPR) establishes the right to data portability, i.e. the right of consumers to have their data transferred from one company to another. On the other hand, the new Payments Services Directive (PSD2) requires banks to open their systems to other players. That way, customers may authorize third-party service providers to access their bank account information to offer them payment initiation or aggregation services.
The problem is that the combination of these two regulation results in asymmetric obligations: while banks have to provide standardized real-time access, large tech companies are only required to share their data on a non-standardized, deferred basis. This asymmetry can distort completion and ultimately undermine financial services users’ interests, concludes BBVA Research.