Does ‘Open Finance’ Promote Competition or Facilitate Free Riding?

This post is an updated and enhanced version of a piece published in Spanish on the author’s personal blog.

Cite this Article
Mario Zúñiga, Does ‘Open Finance’ Promote Competition or Facilitate Free Riding?, Truth on the Market (August 02, 2023),

Financial technology, or so-called “fintech,” is disrupting the financial sector, and that’s a good thing. Fintech services are making finance more digital and more user-friendly. This, in turn, has led to reduced transactions costs and increased levels of competition, innovation, and financial inclusion.

Alas, the emergence of fintech has also been accompanied by a rising chorus of the usual “if it’s good, mandate it; if I don’t like it, forbid it” reasoning that has motivated so many prior waves of regulatory intervention. The resulting regulations may be well-intentioned, but they more often than not lead to unintended consequences.

The European Union, United Kingdom, and Latin American countries like Mexico, Chile, and Colombia all have approved regulations for “open banking” (or its more ambitious version, “open finance”)—a flavor of “interoperability” rules that mandate that traditional financial institutions share information or infrastructure with their tech counterparts. Several other countries have also discussed similar bills and proposals. Given their proliferation, it is worth delving a little deeper into the foundational principles and possible consequences of these regulatory proposals.

In January, Chile approved legislation to promote “competition and financial inclusion through innovation and technology in the provision of financial services.” As part of the Chilean fintech act, financial institutions are required, upon request, to grant “Providers of Information-Based Services”access to certain “open finance” information, stipulated in Article 17 of the act to include:

information on the contracted commercial conditions and the use or history of transactions carried out by the Clients with respect to the financial products and services that they maintain contracted with institutions that provide information, as applicable, including: a) checking accounts and their associated lines of credit, sight accounts, provision of funds and savings accounts; b) credit cards, with their respective associated credit lines; c) money credit operations; d) insurance policies; e) savings or investment instruments; f) card operation services and similar means of payment, and g) other financial products or services defined by the Commission by general rule[emphasis added].

Although it does not address the Chilean law directly, a preliminary report on the fintech market issued by the Peruvian competition authority (INDECOPI) offers a glance at how this would work in practice:

Thus, for example, a currency exchange Fintech can generate a personalized offer with preferential exchange rates based on the information it has access to on which days of the month people usually need to change soles to dollars or dollars to soles. In the same way, if the digital wallets have information on the commercial establishments preferred by their clients to purchase products or services, they will be able to create alliances with said establishments to offer discounts or better offers to their clients. However, Fintech companies currently do not have any mechanism to access the information that banks have about the clients of the services they provide in the different markets, which places them in a disadvantageous situation for the development and expansion of their commercial offer. compared to larger entities that have abundant information on their customers (for example, transactional data), thanks to which they can develop more accurate credit profiles and a more attractive commercial offer.

This would be done, of course, for the laudable goal of promoting competition. As pointed out by another recent report prepared by an alliance of fintech associations from the member countries of the Pacific Alliance:

Open Finance standards allow financial service providers to compete on a level playing field, making it easier for consumers to easily compare financial products and services from different providers and choose the one that best suits their needs.

The problem with these regulatory proposals is that they start from debatable premises. In public policy, as in medicine, a bad diagnosis can lead to an even worse remedy.

It is important to clarify, first, that neither competition policy nor regulation have (or should have) as a goal a “level playing field” between competitors. The phrase is catchy and sounds intuitively appealing, to be sure, but it can lead to the negation of competition itself. The proper goal of antitrust law is to prevent distortions of competition, not harms to any particular competitor.

Regulation, in turn, should impose rules to replicate a competitive market where “market failures” (natural monopolies, public goods, severe externalities, or severe informational asymmetries) prevent competition forces from behaving as they would otherwise. Antitrust law and regulation do not (and should not) aim to forbid an economic agent from benefiting from the competitive advantages that it has lawfully and legitimately obtained. That would not be competition. It is one thing, of course, to level the regulatory playing field (where do I sign?), but an entirely different thing to force competitors to be absolutely equal.

Secondly, open-banking proposals seem to be based on the premise that all information always belongs to the clients, without any consideration of the effort and investments made by financial institutions to collect, store, process, and aggregate said information to generate value. The INDECOPI report, for example, appears to ignore the fact that financial institutions possess such information only because they have provided services (a loan, for example) to their clients. Often, the consumption patterns recorded are even encouraged by financial institutions through agreements with establishments, such as, for example, discounts granted to employees that receive their salary in dedicated accounts. After the data is gathered, it needs to be processed—i.e., stored and aggregated. But this entire process of turning more or less random snippets of information without any inherent worth into valuable data through collection, storage, and aggregation is not free; to the contrary, it requires substantive investments in services and technological infrastructure.

As can already be inferred at this point, the problem of forcing financial institutions to share this information is that it creates a serious problem of (dis)incentives: why would a firm invest in generating valuable information if regulation is going to force them to share that information with its competitors? This would create precisely the free-rider problem that some state interventions (in the form of public goods) try to solve.

Could traditional financial institutions act in an anticompetitive manner against fintech? Yes, it is a possible scenario. Hypothetically, a financial institution could deny access to its infrastructure or a certain resource to fintech firms, and that could (conditionally) constitute an abuse of a dominant position (subject to demonstrating such a position in the first place). Also, hypothetically, two or more financial institutions could enter into agreements to boycott the operation of fintech services. But in such cases, the solution lies in antitrust law, which penalizes such practices without the need to issue new regulations.

The case for (more) regulation of the financial sector should be based on solid evidence of market failures that make competition unviable in the medium and long term. I am often mocked when I say that the Peruvian market for financial services is reasonably competitive. Proponents of regulation point to allegedly high levels of concentration as sufficient evidence of a noncompetitive market. But, as we know, concentration alone is not sufficient evidence that a market is necessarily anticompetitive.

This is true not just in general or in the abstract, but also specifically in Perú. There’s evidence, for example, that high market shares in Latin America are related to efficiency and not to market power. Even when three or four “big” banks have a high share of savings and credit colocation, they constantly “steal” clients from each other. Also, the demand for financial services has been rising, while interest rates have been declining. There has been entry of new (traditional) banks and, of course, there is the entry of the fintech firms themselves. I don’t see how such a market is not (reasonably) competitive.

The entry of fintech is a positive phenomenon. These are services that can promote greater financial inclusion and innovation. It has introduced, for starters, incentives for traditional financial institutions to get their act together and improve their offerings of services and digital channels. Clearly, they can promote efficiencies by reducing transaction costs. For this reason, they have been able to enter the market without the need for this type of regulation. Moreover, fintech have disrupted the financial services market, in part, because they are not burdened by the regulations applicable to their traditional counterparts (e.g., compliance costs, obligation to have physical offices, etc.).

One should be careful when asking for more regulation. It often bites back.