The financial sector has been the object of many innovations in recent years, with significant impact on consumers and on regulation. Retail banking is no longer solely branch-based, but can be conducted in many ways, including using mobile telephones. Banks have had to adapt their business models to deal with persistently low interest rates, low credit growth, and increasing competition in retail from FinTech and platform-based competitors, all which threaten the profitability of traditional banks. The use of algorithms, big data, blockchain, peer-to-peer lending and crowdsourcing, means that the role of the intermediary is changing: banks now face competition from other intermediaries in their core business. Digital disruption is changing the provision of services in the sector, but may also be solving some of the previous competition problems in financial markets, such as high switching costs, or high transaction costs.
Traditional banks have seen parts of their core business – ranging from payment services and credit to advisory services – encroached upon by digital competitors. The advantage held by FinTechs is that they can use state-of-the-art technology, operate a leaner business and focus on those business segments with higher returns. They also face disadvantages, such as a lack of reputation and brand recognition, the absence of a customer base, limited access to capital markets, and a starting point with not much information about customers in general. Now other players are also entering the market for financial services, namely the BigTechs: Apple and Google, but also retail giants such as Amazon and Tesco, are moving into the provision of financial services. BigTechs can use data garnered from clients, combined with their leading edge in the application of digital technology and artificial intelligence. On the other hand, the competitive impact of a third party’s right to access bank account data by virtue of open access regulation offers an opportunity to reflect on the competitive value of an economy based on the free-flow of data and on how to ensure a level playing field among competitors.
Historically, financial markets have seen tension between competition and stability. Regulation has not always been adequate to ensure stability and has periodically been superseded by innovations.
In June 2019, the OECD held a roundtable on the degree to which digital disruption from FinTech and BigTech impairs stability and whether these players need a different type of regulatory oversight. It also discussed the degree to which better regulation can solve the conundrum of competition-versus-stability, and debated whether new actors from FinTech and BigTech create systemic risks similar, or indeed different, to those inherent in the traditional banking model. View materials below.
In February 2020, the topic was again discussed during the 2020 OECD Competition Open day at the OECD in Paris.
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