The Case of the Access to Account Rule in Data, Innovation and Competition in Finance Presented by: Mr. Borgogno and Mrs. Colangelo Date: 27 March 2020 Overview - Consumer inertia - Data bottleneck problem - Why antitrust enforcement is not fit for purpose - Thesis: competition through ex-ante regulation - The PSD2 access to account rule - Towards Open Banking: FinTech and BigTechs Why Are We More Loyal To Our Bank Than To A Partner? - UK Payments Council, 2013 • We stay with our bank for 17 years, but only stay married for 11 which is why we may resist "switching". The UK Retail Banking Market Investigation (2016) - SUPPLY-SIDE: highly concentrated market: the four largest - banks (RBSG, LBG, Barclays and HSBCG) retain a combined market share ranging from 70% to 86% over the last decade - DEMAND-SIDE: 3% of customers switched banks accounts every year (13% in savings products and over 30% in energy) - Larger banks charged higher prices than smaller banks: evidence of market power - Consumers low engagement: supra competitive profits for banks (consumer loyalty was not rewarded, but punished) - Each customer standing to gain £90 per year on average from switching his/her bank account Financial Services Are Awash In Data - Massive increase in data availability and a substantial decrease in the cost of computing power - Data-enabled services: insights into personal expenses, budgeting, comparison tools and tailored financial planning - Customers' transaction data are valuable for new entrants The Data Bottleneck Problem - Payment services are at the forefront of the competitive issues - Gateway role played by banks holding customer data - Tight control over their clients' account data - Banks lacked incentives to share consumers data with downstream companies: concerns to end up as "dumb pipes" Data Access Through Antitrust: Essential Facility Doctrine - Developed in the US in 1912 (Terminal Railroad) and transplanted in the EU - Essential Facility Doctrine: a monopolist has a duty to share its facilities with everyone asking for access, including competitors - Exception to freedom of contract (refusal-to- deal) - Dominant position on customers data: "the data of an ING customer is not available to ABN Amro or Rabobank, and vice versa" (ACM, 2017) It can't work… - The exclusion of effective competition in a secondary market requirement: often there is no downstream market for data - "New product" requirement: firms do not know in advance how they can use the data - Administrability problems of compulsory licenses - Compliance with data protection law The Turn Of Regulation In The Payment System - Directive (EU) No 2366/2015 on payment services in the internal market (PSD2) - Access to Account Rule: AISPs and PISPs - Banks shall allow third parties to obtain real-time data relating to customers' accounts as well as execute all the payment orders transmitted via a third- party's interface as if they were sent directly by the customer through the banking infrastructure - Explicit customer consent Regulatory Technical Standards - From screen-scraping to Strong Customer Authentication - Level 2 legislative process led by the EBA - Banks dedicated interfaces: risk of surreptitious interference against TPPs - Direct access as fallback remedy - Containing Coronavirus through e-payments: on March 25, the EBA encouraged PSPs to make maximum use of the limits set out in the RTS for contactless payments without SCA (i.e. 50 euro per transaction, 150 euro or 5 transactions cumulative) Implementing The Access To Account Rule - Application Programming Interfaces (APIs) are necessary to implement the Access to Account rule and RTSS - Interoperability and APIs standardization are key - Otherwise PSD2 is set to remain a dead letter The CMA Market Order (2 February 2017) - Nine largest banks had to develop a set of Open Banking Standard APIs - Broad UK regulatory strategy: regulatory sandboxes and innovation hubs - Creation of a seamless process for customers to engage with the market and switch provider - Common API available to all participants for free Key to reducing barriers to entry Demand-Side Remedies As The New Frontier? - The retail-banking sector has traditionally been affected by low elasticity of demand, consumers stickiness, and lock-in problems which has allowed banks to enjoy economic rents - Consumer behavior influences market dynamics: consumer engagement plays a key role in driving effective competition: switching, multi-homing and the competitive pressure over incumbents - Goal: increasing the bargaining powers of customers towards banks The Global Wave Of Open Banking - Many countries are following suit (Australia, Canada, Singapore, Japan, EU member states) - Regulatory competition has just started: goal of attracting investments - Need for regulators to oversee Access to Account implementation Actual Fintech Disruption? - Incumbent and FinTech as friends rather than foes: complementarity and cooperation (empirical studies suggest that banks prefer to interact with FinTech as service providers, avoiding expensive and sophisticated integration efforts) - FinTech face some competitive disadvantages vis-a-vis incumbent banks (absence of an installed customer base, limited access to soft information about potential customers, lack of reputation and brand recognition, a relatively high cost of capital). - FinTech start-ups access to clients and may reduce their regulatory compliance burden. In turn, incumbents get access to innovative technologies - By opening the path towards Open Banking, data portability obligations may also favor the entry of players other than FinTech companies... - BigTech advantages: established networks, large installed customer bases, powerful brands, considerable earnings and unfettered access to capital markets, proprietary customer data from their non-financial-service operations to help tailor offerings to customers' preferences. - Access to the analytical tools and the forefront technologies (including cloud computing, artificial intelligence and machine learning) to process customer and transaction data in order to anticipate customers' needs New Frontiers For Antitrust - Regulatory responsibility of banks implementing a platform business model Acting as regulators and being at the same time participants in the market, banking platforms may leverage their power in anti-competitive ways (bundling, self-preferencing). See: Google Shopping case (2017) - Collusion: European Commission 2017 inspections in the offices of European banking associations in Poland and the Netherlands (evidence of alleged anticompetitive practices aimed at blocking non-bank-owned providers of financial services from gaining access to the account data of customers who authorized it). Regulatory Responsibility Of Platform Banks? - Duty to ensure that competition on their platforms is fair, unbiased, and pro-users Conclusion - PSD2 and the UK Open Baking remedy as potential best practices to address data sharing competitive issues - Unintended consequences: from FinTech to BigTech? - The relevance of demand-side interventions: a new frontier for competition law? - Smart consumers as the new paradigm for the digital era: would they embrace it?