As mentioned in my previous post, new regulations are having an impact in shaping the digital economy as we know it.

However, it is still in the regulatory front where we can see a clear mismatch and the need to evolve to keep up with the new models and players. Our particular elephant in the room is that our regulation is somehow stuck in the analogue world to quote Santander’s chairwoman Ana Botin. In order to address this, there is no need to change the underlying principles of the regulation, but the way it approaches a fundamentally different reality with huge players who are also active in the financial services arena and where borders between sectors are completely blurred.

It’s also important to note that supervisory bodies are currently facing completely new dynamics that need to be assessed to ensure that they are able to comply with their supervisory duties. In fact, the European Commission is calling on the European Supervisory Authorities (ESAs) for advice on how these new players and their dynamics are having an impact in terms of the fragmentation of the value chain, and how platforms are modifying the way financial products and services are rendered. Most crucially they are looking into how the cross-sectoral nature of certain players (referred to as mixed activity groups — MAGs) may allow them the possibility to fly under the supervisory radar in some situations.

As a result, we are seeing varying responses from relevant institutions. Most prominently the Bank for International Settlements (BIS) is advocating for a combination of entity-based together with an activity-based regulation as the best approach.

Financial stability and customer protection are absolute core objectives for any regulatory activity. But in addition to that, regulators shouldn’t lose sight of the competition issue. All players should be able to compete under the same conditions. The level of regulatory burden and supervisory scrutiny should be tied to the activity each institution performs and to the risk it poses. This level playing field is the best guarantee for markets to be contestable and to ensure that all players can innovate, with a clear absolute winner that is always the customer.

Being successful in designing the necessary level playing field from a regulatory perspective and ensuring the appropriate supervisory oversight framework context is of the utmost importance in this new digital world. Because there´s a thing that is also crystal clear: most companies are probably operating rightly from the current regulatory standpoint, but the issue probably lies in the discrepancy between regulation and the new market dynamics. In my view, there are three elements that are essential to designing the much-needed level playing field:

• Cross sectoral access to data, always with a customer-centric view. The data needed to provide superior financial products and services needs to be sourced from all aspects of a customer’s digital journey and not only those generated within the financial services space. bigtechs’ access to these datasets garners them huge competitive advantages. As there is no cross sectoral data sharing framework, payment institutions only have access to data generated within the payments space — opening this up will play a huge role in leveling the playing field.
• Access to infrastructures. Technical providers playing a vital role in the provision of financial services. In the same vein, some tech companies have control over vital enablers in the provision of certain services, blocking access to third parties. An example of this is certain mobile phones companies and the access to specific software. Opening this up would encourage and fast-track innovation as we know it.
• Proper regulation that equally captures every player participating in the market. Regulation must become a flexible tariff that is set according to the activity each key player performs but that also considers the individual and distinctive risks they pose to the market. To illustrate this, any bigtech company providing payments can do that with a light license (as payment service provider). However, a company that is also paying services in the same space but are part of a banking institution, is bounded to the full prudential regulatory burden of the bank. Even being a separate company, who do not take deposits from customers and have its own regulatory regime by the activity performed (payments). This has an impact on the level playing field, for example in remuneration, making it more difficult to compete in equal terms. Equally, if a non-bank is providing financial ecosystem services such as payments on a scale that makes them a critical feature of the economic system they should be regulated accordingly. There are technology providers not registered as payment service providers, but which leverage on their infrastructures to interact with customers and set the conditions of the payments market. They should be included in the scope of PSD2. Also, as things move forward, and some big techs continue to increase their presence in the financial services market, their operations may acquire systemic importance. This should be acknowledged by the regulatory framework.

If regulators and supervisors are able to define this framework in a fashion that suits the specificities of our digital context leaving behind the outdated analogue approach (siloed), we will be set to reap the benefits of the new models while building an environment that protects customers and ensures financial stability in a highly competitive, innovative environment.

As the disruptive, technology-based payment businesses of Banco Santander, we at PagoNxt define our business as a fintech company with the heritage of a leading global bank. When it comes to operating in a post-covid, customer-centric world, we recognise the benefits of a financial institution´s mindset and nimble agility of a fintech. Operating at this crossroad, we have bolstered our activity and service offerings across the payments landscape to create solutions that suit global needs at a local level.

‍