Regulating Open Banking: A Comparative Study of the EU, UK, and Taiwan
Financial technology (‘FinTech’) innovations have caused digital transformations in modern financial markets. Due to their ability to reduce transaction costs by facilitating information flow, new market players (such as FinTech companies) have emerged in various markets, including the payment market. However, these FinTech companies often face market entry barriers as the market and incumbent players clash, leading to an anti-competition tendency. Therefore, open banking (‘OB’) policies have emerged in some jurisdictions as they can unleash the advantages of new market players while mitigating potential market failures. The OB policies urge or encourage incumbent financial institutions, such as banks, to open their data pools and application programming interfaces (‘APIs’). Against this background, what policy implications can we draw from comparing the compulsory and voluntary approaches to OB policies? What are the implications with respect to the organizational design of modern financial regulators from an institutional design perspective?
For example, the second Payment Services Directive (‘PSD2’) in the EU and its transposition in the UK exemplify the ‘compulsory’ regulatory approach to OB. In contrast, in Taiwan, OB is promoted on a ‘voluntary’ basis, as the Financial Supervisory Commission (the ‘FSC’) relies on banks to draft and implement self-regulation for OB. [GN1] However, in Taiwan, banks and FinTech companies may be viewed as competitors. Therefore, it is doubtful if incumbent banks are truly incentivized by OB to open their data pools to FinTech companies, and whether the initial regulatory goals of OB policies—promoting financial innovation, competition, and inclusion—could be achieved. From the public choice perspective, the problems with OB policies in Taiwan demonstrate how private interests can have an impact and how banks may try to seek rents. Therefore, we doubt that the regulatory objectives in favor of public interests can be achieved.
In our book, we provide some recommendations from the perspective of institutional design. We suggest implementing an independent and professional regulator that is exclusively responsible for encouraging innovation and competition. Being an independent entity, this regulator may not only be less vulnerable to undue influence but also help avoid mission conflicts between prudential concerns and the promotion of financial competition and innovation, due to its concentrated responsibilities. The UK Competition and Markets Authority (‘CMA’) and the Open Banking Implementation Entity (‘OBIE’), which are the authorities leading OB and delivering the benefits of OB, mirror the importance of the aforementioned independency. When it comes to redesigning the regulatory framework in Taiwan, we could consider concentrating the mission of promoting financial innovation and competition on an independent regulator that is currently in Taiwan's executive branch, such as the Fair Trade Commission (‘FTC’) or the newly established ‘Ministry of Digital Affairs’ (‘MDA’), which is specifically tasked with overseeing digital affairs that may involve FinTech. To ensure the accountability of this independent regulator, we recommend that FinTech companies be actively involved in the regulatory rulemaking process. Additionally, the regulator's rulemaking procedures should be transparent and the regulator itself should be staffed by professionals who are less susceptible to the influence of private interest groups, such as industry associations.
In conclusion, our book suggests that a compulsory approach may be necessary to overcome the resistance of incumbents when implementing OB. Furthermore, in the FinTech era, an independent regulator, rather than a traditional sector regulator, may be better equipped to resist the influence of incumbents and achieve goals such as fostering financial innovation, competition, and inclusion.
Chang-hsien Tsai is a Professor of Law and Business and Director of the Institute of Law for Science and Technology at the National Tsing Hua University, Taiwan.
Kuan-Jung Peng is a PhD in Law & Economics and a European Doctorate in Law & Economics from Erasmus University Rotterdam, the Netherlands; University of Hamburg, Germany; and University of Bologna, Italy.
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