In its consultation response, Finance Watch agrees that the EU financial sector should embrace digitalisation. Regulation of financial services should not be seen an obstacle to innovation. States that have long applied light-touch regulation to support their technology industries are now increasingly ready to intervene with regulation to curb the negative externalities associated with the products and services they promote.
Finance Watch expects digitalisation to contribute to the availability and accessibility of financial services as customers are able to obtain information, receive offers and enter into contracts online, anywhere anytime. Customers also stand to benefit from the convenience of being able to access account information and to enter into transactions online, often in near-real time.
Other potential benefits of digitalisation depend on framework conditions that may be more difficult to realise. If implemented properly, digitalisation should improve customer choice and enable customers to obtain better value from tailored offerings, based on digital profiles that reflect customers’ requirements and preferences.
In order to realise these benefits, EU regulatory initiatives will have to address, in particular, the following challenges:
1. “Big data”, information asymmetry and the risk of unfair commercial practices
In the digital era, consumer protection begins with data protection. Many citizens are still not alert to the Faustian bargain of trading their personal data against seemingly “free” digital services. The underlying economic terms of this trade are unknown and, arguably, unknowable for the individual citizen.
There is ample evidence, however, that citizens are short-changed in this trade, because a) the marginal utility of data increases with volume, at least for the present time; and b) individuals are excluded from the (wholesale) markets where their data is monetised – the supply-side of the market for personal data is atomised and suppliers have no bargaining power.
Insights gained by the supplier from the analysis of that data, individually and collectively, further increase the asymmetry of information and tilt the balance of bargaining power against the customer. That, in turn, significantly increases the risk of suppliers engaging in unfair commercial practices (exclusion from service, discriminatory pricing) or market abuse.
2. Customer choice, network effects, and supply-side concentration
Network effects are a typical feature of markets for digital services: dominant market positions become self-reinforcing because the marginal utility of the service for all users increases with each additional user, resulting in a “winner takes all” scenario. Unless reined in at an early stage, the outcome in financial services may not be much different.
The emergence of “too big to fail” digital service providers alongside, or in place of current “too big to fail” financial institutions will hardly increase consumer choice and enhance competition – it could result in the exact opposite. Market entry by “Big Tech” players, in particular, is highly likely to increase supply-side concentration and, as a corollary, systemic risk.
This effect may take a while to manifest itself – not least because “Big Tech” players are more likely to co-opt, rather than compete with incumbents in the early stages. In due course, however, retail financial services, in particular, could end up being dominated by “Big Tech” brands.
Particular scrutiny should therefore be applied by competition authorities in respect of partnerships between “Big Tech” and incumbent financial institutions where the disparity in size and resources, and control of the customer relationship may, immediately or over time, result in the regulated entity being relegated to the role of a formally independent, but ultimately powerless junior partner, akin to a franchisee, while the technology firm could exercise effective control without being itself subjected to financial services regulation.