Fintech Startups and Incumbent Players Series - Pro-competitive regulation and consumer inertia in the face of Open Banking

The increasing pace of FinTech development has triggered a worldwide race among policy makers to overhaul their own regulatory landscape in order to be as innovation friendly as possible. Consequently, a vast array of new tools and regulatory practices have emerged over recent years, threatening to disrupt traditional approaches to regulation. This raises the need to explore the true potential of each allegedly new practice to avoid any confusion between original, far-reaching avenues of market regulation and rebranding of old ideas prompted by legal marketing considerations.

By drawing on our article on the data access regime enshrined in the Payment Service Directive (PSD2), in two follow-up papers we investigate the pro-competitive paradigm underlying the Open Banking projects emerging worldwide. We argue that this approach is the most suited to strengthen consumer bargaining power and harness the competitive potential of data-enabled services within retail financial markets.

In our first paper ‘Regulating FinTech: from legal marketing to the pro-competitive paradigm’, we put these newly arisen tools into a systematic framework by distinguishing three different, but not mutually exclusive strategies: laissez-faire, functional regulation and tailored regulatory strategies. This last one requires regulators to identify the original features of specific market developments and accordingly design pieces of regulation, tailored on such new technology-enabled functionalities. In our view, this strategy represents the Pandora’s box from which the largest part of new regulatory measures involving FinTech is stemming. For instance, regulatory sandboxes and innovation hubs are worthy of consideration as they allow to evaluate services and business methods with reduced risk of regulatory exposure. However, policy makers need to be aware that such tools are resource intensive and tricky to handle for regulators.

Rather than requiring regulators to engage in mammoth tasks (such as offering general counselling to market participants in the process of product design and implementation), the pro-competitive paradigm focuses on ex ante regulation in order to lay down regulatory mechanisms able to open up the market to new entrants. It will be up to them to make use of these tools to develop and test innovative services and business methods in the market. Against this backdrop, innovation facilitators are set to perform the marginal (yet useful) task of helping regulators to adjust current rules according to the principle of proportionality. Building on this systematisation, we present ‘pro-competitive regulation’ as a new, far-reaching paradigm that promises to unlock the competitive and innovative potential of FinTech.

Against this backdrop, in our second paper ‘Consumer inertia and competition-sensitive data governance: the case of Open Banking’ we investigate the Open Banking and Open Finance projects in the UK and similar measures recently enacted in Australia, Canada and in South East Asia countries. In particular, the UK remedy is based upon the access-to-account rule (XS2A) introduced by the PSD2, under which commercial banks must allow third parties to obtain real-time data on users’ accounts upon customer consent. While acknowledging the need to avoid any early excitement about their success as they are still under implementation, we praise them as regulatory measures, specifically tailored to curb FinTech market failures in a coherent and original way.

More specifically, consumer-facing remedies designed to enhance customer engagement are becoming topical in driving effective competition on the markets. Indeed, while competition authorities often focus their efforts on ensuring that the supply side of a market is functioning competitively, a poorly-functioning demand-side of a market can increase the market power of suppliers and/or lead to competition occurring along dimensions that are less relevant to consumer welfare.

Rather than just protecting fragile consumers, pro-competitive regulation can give individuals more control over their data and digital consumption choices, thereby implying a significant shift in the way in which policy makers conceptualise digital consumers. Indeed, a well-functioning market requires consumers to be able to access the right information, assess that information, and act on their assessment in choosing products and providers. Behavioural biases and consumer disengagement must be duly targeted when tackling market failures as they can represent the main barriers to workable competition in certain markets. Rather than insisting on old-fashioned mandatory disclosure duties, Open Banking relies on more promising behavioural solutions by reducing the hassle of switching and encouraging consumer searching and shopping around.

Nevertheless, a pivotal role in determining the pro-competitive goal of the regulatory intervention at stake will be played by consumers’ reaction and feedback. Recent data related to British consumers’ perspectives in financial services show some evidence which could signal a slowdown in the adoption of Open Banking. Notably, the UK Financial Conduct Authority reported that only 3 in 10 consumers have ever switched their current account but 44% of adults have more than one active current account. Furthermore, 70% of account holders who have held their account for over three years have never switched provider and 35% said that nothing would encourage them to switch. The FCA also mentioned surveys suggesting that most consumers are reluctant to share data with providers other than their main bank.

Against this background, Open Banking shines out as an innovative way of fostering consumer engagement through FinTech innovation. Its success hinges on consumers’ willingness to embrace the digital revolution and to make full use of the bargaining toolkit provided by regulators.

Oscar Borgogno is a PhD Candidate, Law Department, University of Turin and Research Intern at the Bank of Italy.

Giuseppe Colangelo is Jean Monnet Chair in European Innovation Policy and Associate Professor of Law and Economics, University of Basilicata.


With the support of