This presentation by Miguel de la Mano (Compass Lexecon) was made during a workshop on “Regulation and competition in light of digitalisation” held by the OECD in Paris on 31 January 2018. More papers and presentations on the topic can be found out at oe.cd/wrcd.

1. Miguel de la Mano
Paris, 31 January 2018
OECD Workshop on “Regulation and Competition in Light of Digitalisation”
An economic perspective
The Fintech Challenge

2. COMPASS LEXECON 1
• Technology has been driving financial markets for decades
• Financial Stability Board definition for Fintech :
– “technologically enabled financial innovation
– that could result in new business models, applications, processes, or products
– with an associated material effect on financial markets and institutions and the provision of
financial services”.
• Fintech is enabled by the availability of
• (i) computer power, (i) intelligent algorithms, (iii) availability of massive
amounts of data and (iv) mobile storage through the cloud, and (v) mobile
hardware that provides constant accessibility.
• It has the potential to improve financial intermediation and to disrupt
established financial intermediaries.
THE DAWN OF FINTECH

3. COMPASS LEXECON 2
• The Fintech challenge is to foster ‘good’ disruption while preventing ‘bad’
disruption
• Any major technological innovation combined with a viable business model
has the potential to disrupt established companies:
• by providing better services to the benefit of consumers.
• bypassing regulation that is primarily intended to protect the incumbents.
• However, it can also bypass useful regulation.
• Disruption could be harmful if its profitability is a result of arbitrage against
useful and perhaps even systemically important regulation.
• Uber, AirBnB, Amazon, Apple i-Store, Kayak, Booking.com….
THE FINTECH CHALLENGE

4. COMPASS LEXECON 3
THE ECONOMIC SIGNIFICANCE OF FINTECH IS STILL LIMITED...

5. COMPASS LEXECON 4
BUT IF RECENT HISTORY OFFERS ANY LESSON IT IS THAT
REGULATORS HAVE TO STAY ONE STEP AHEAD

6. COMPASS LEXECON 5
• Fintech’s potential derives from the use of technology to:
• more directly match savers and investors and
• overcome information asymmetries more effectively by the
efficient use of large amounts of data.
• It will have a significant impact on:
• how consumers access and use their financial services
• And on how banks deliver them.
POTENTIAL BENEFITS OF FINTECH

7. COMPASS LEXECON 6
• New Apps: Access to accounts, view balances, make and receive payments,
and manage personal finances on our mobile services, at all times.
• Cheaper and more efficient payments
• Crowdfunding: Better matching of lenders and borrowers
• Smart Contracts: Savings from automated transactions
• Mining Big data will improve
• (i) credit risk assessments
• (ii) investment returns o
• (iii) the pricing of insurance contracts,
by exploiting the value of information.
BENEFITS TO CONSUMERS

8. COMPASS LEXECON 7
• Banks are also benefiting from technological advances which
change the way in which they work and deliver their services.
• automation of manual processes, which should reduce risk, increase
accuracy and speed through straight-through-processing.
• Artificial Intelligence and robotics will increasingly support decision making,
as well as standardising and enriching customer interactions.
• The migration to more modern banking platforms will reduce the
complexity of their IT architectures
• Easier for banks to outsource processes and to exploit cloud technologies.
• Distributed Ledger Technologies (DTL)
• All these changes offer the opportunity to scale rapidly and lower entry
barriers
TECHNOLOGY CAN FUNDAMENTALLY CHANGE BANKS AND HOW
THEY COMPETE

9. COMPASS LEXECON 8
• Big players such as Amazon, Apple or Google are already active in Fintech.
• users of alternative payment systems such as Apple Pay, Samsung or Android
Pay has also been increasing steadily since 2015 rising from 18 million in 2015
to 144 million in the first half of 2017.
• Large internet firms have databases and intelligent algorithms which in
principle give them significant information on both potential borrowers and
lenders
• Not only payment systems: in June 2017, Amazon announced that Amazon
Lending had surpassed $3 billion in loans to small businesses since the service
launched in 2011, reaching more than 20,000 small businesses
A CLASH OF TITANS: TECHFINS VS FINTECH

10. COMPASS LEXECON 9
TBTF VS FINTECH – (FINTECH AT THE BANKERS’ GATES)

11. COMPASS LEXECON 10

12. COMPASS LEXECON 11
• The CMA take action:
• Diagnosis: competition is not working well
• Remedy: Open Banking (on the back of PSD2)
• Open Banking aims to make it easier to compare and switch UK
banks.
• Banks must share their customer data with other companies
…if customers give permission.
• Third parties will also be able to make payments on behalf of
customers, or manage their finances for them.
FINTECH OPENING SALVO: OPEN BANKING

13. COMPASS LEXECON 12

14. COMPASS LEXECON 13
• Benefits for customers such as current account comparison services, personal
finance management and easy access to credit services:
• Money management (e.g. overdrafts)
• Lending
• Payments (e.g. directly from bank account)
• Increased competition:
• Banks are DRIP.
• They will have to get their act together if they do not want to become dumb pipes
• A huge wave of new data from rival banks could be used to build smarter, better products.
If that fails:
• Partner with Fintech start-ups… or take them over.
• The Big Threat: Techfins! … and asymmetric access.
IMPACT OF OPEN BANKING

15. COMPASS LEXECON 14
• Algorithmic screening: discrimination and exclusion
• Data privacy
• Lack of consumer protection
• Bargaining power shifts to providers of financial products
• Conflicts of interest
• Transparency may create opportunities for tacit collusion
• Financial exclusion
• … is it realistic to opt-out?
UNINTENDED CONSEQUENCES

16. COMPASS LEXECON 15
• In the short run: regulatory sandboxes.
• Guarantee proportionality to maintain innovation incentives: “coffee for all” may not be
appropriate
• Address competition concerns timely, before dominant positions get entrenched or abuses
become too costly to address.
• Avoid regulatory arbitrage
• Ensure consumer protection
• Empower customers to take ownership of their data
• Clear assignment of regulatory responsibility and coordination
• In the long run: Principles based regulation
THE REGULATORY CHALLENGE

17. COMPASS LEXECON 16
Thank you for your time!