As the pandemic accelerates digital transformation, competition risk mounts for financial services

The technological transformation that has been disrupting financial services has only been accelerated by the challenges mounted by the COVID-19 crisis.

Financial institutions have needed to adapt internal and external processes rapidly in order to maintain and enhance online services during the pandemic, as well as respect public fears of the virus spreading through cash transactions.

Pre-crisis, the industry was also seeing competition intensify with, among other things, large digital payment solution platforms such as Apple Pay and Samsung—along with many smaller competitors with niche offerings ranging from independent online trading platforms to digital loans and financing providers—having entered and expanded in the market. This is all set against the larger industry backdrop of generational Payments Canada modernization plans which include the Real-Time Rail and Lynx initiatives.

These changes represent challenges and opportunities for industry players across the board. While most of these developments will naturally require individual responses from financial institutions, there will also be circumstances where the most efficient, innovative, and pro-competitive outcomes will involve competitor collaborations to ensure customers get the benefit of technology faster and more broadly.

In the wake of the pandemic crisis, issues continue to evolve, and increasingly, antitrust authorities are being asked to expand their market scrutiny and enforcement action.

As the financial services industry charts the course ahead, including to address collaboratively public safety concerns (at a minimum), and what platforms or standards may need to be developed to respond to a more digital and competitive market, industry players can look to lessons learned from two important cases: the Interac and Visa/MasterCard et al. experiences.

Lessons from Interac and Visa/MasterCard et al.

The Interac experience

The lesson of Interac is to avoid potentially becoming a victim of your own industry success and seek instead to establish, from inception, open and non-discriminatory platforms. This will help shape the proper commercial investment framework for participants as well as mitigate the risks of anti-competitive harm and competition enforcement.

In 1996, in the wake of its initial success and adoption, Interac was forced to sign a consent agreement that opened up the Interac network beyond Interac’s charter members and established Interac as an open and non-discriminatory platform.

As access to the Interac platform became essential in the industry, the consent agreement removed what the Competition Bureau deemed anticompetitive membership criteria and access terms, in order to promote overall competition in financial services as well as set cost-based fees for shared cash dispensing and direct payment services among industry participants.

It took almost 25 years to see Interac finally released from the costly burden of consent agreement compliance. Had Interac been designed as an open and non-discriminatory industry platform from the outset, arguably, much of this burden could have been avoided.

The Visa/MasterCard et al. experience

The lesson of the past decade’s Visa and MasterCard et al. global litigation saga is for founders and principals of common customer-facing and even backend platforms to avoid being at the centre of establishing specific platform fees and service terms. Remaining at the heart of these decisions raises the risk of later being accused of directly setting anticompetitive terms and/or sharing competitively sensitive information which can become the subject of competition investigations and litigation.

As recently as June in the United Kingdom, along with the United States, Canada, South Korea and beyond, Visa and MasterCard et al. have been the focus of landmark decisions and settlements and fines as well as countless private litigation suits (some of which are ongoing). Around the world, antitrust authorities and merchants pursued major banks and credit card networks alleging that, among other things, interchange fees and merchant rules were the result of bank-led conspiracies as, prior to the credit card companies’ becoming public, bank representatives sat on the boards of those companies and played a significant role in setting the much-maligned fees and terms.

Again, if many of these platform fees and service-term decisions had been made by an independent committee or in a clean team structure, competition risks could have been mitigated.

Enforcement in the new world

Financial services are at the heart of the digital transformation of the economy for consumers and businesses alike, especially as we continue to deal with the implications of the COVID-19 crisis. In this new world, issues are evolving and are often unexpected, and legislation is not keeping up. Increasingly, antitrust authorities are being asked to fill this gap, expanding their market scrutiny and enforcement action.

But as the saying goes, an ounce of prevention is worth a pound of cure: applying past lessons learned, including those of Interac and Visa/MasterCard et al., will go a long way to mitigating competition risks and avoiding the pitfalls along the uncharted road ahead.

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