By Alex Vronces
Two years after Apple’s app store launched in 2008, CIBC introduced the first mobile banking app in Canada. Customers of CIBC could use their iPhones to manage account balances, pay bills, and even send Interac e-Transfers. Fast forward a decade later and they could do a little more, including opening a bank account and viewing their credit scores.
While some banks are still bragging about their apps, others are bragging about their app stores.
Standard Bank, a bank based in Johannesburg, South Africa, recently opened an “online shopping mall” for its corporate customers. The platform is essentially a combination of apps and app-developer tools.
Call it the banking-as-an-app-store model of banking, which isn’t how many banks conceive of themselves today. As Chris Skinner is reported to have said, a bank needs to go “from being a control freak to having open partnerships” if it’s to become an app store for financial services, but “most haven’t even started.”
Open banking is supposed to change that. By forcing banks open and establishing a common way for developers to get inside, open banking is supposed to trigger a Cambrian explosion of financial-services apps.
On the one hand, it’s a good move to make the financial sector more competitive. Market concentration is high. And so are the barriers to entry, which prevent new and innovative firms from giving incumbents a run for their money. At the margins, new financial-services apps will compete with similar offerings from incumbents.
On the other hand, the combination of control-freakery and a Cambrian explosion of financial-services apps may make banking even more concentrated and less competitive than it is today.
More platforms, more problems?
More and more, Canadians are managing their finances on their Apple or Android mobile phones, which is empowering. A mobile phone, connected to the Internet, puts the digital world at your fingertips.
But it’s also paralyzing.
The digital world is noisy. People need trusted intermediaries between them and the rest of the digital world to help them distinguish the signal from the noise. It’s no coincidence that the “winners” of the digital economy over the past several years have all been curators: Amazon for merchants and consumers, Uber for riders and passengers, and Facebook for advertisers and consumers.
For banks, one winning strategy is to become the app store for financial services. Canadians already trust what their banks tell them. If Canadians are going to need a trusted intermediary to nudge them toward which financial-services apps to try, it’s reasonable to assume Canadians will trust their banks more than anyone else.
Herein lies the problem: app stores are fertile ground for anti-competitive outcomes.
In economic parlance, app stores are digital platforms in multi-sided markets. The goal of platforms is to connect different sides of a market, enabling the sides to do business together, while taking their own cut from the different sides along the way.
For example, Uber is a platform connecting drivers and passengers. So is Amazon, but they connect merchants and consumers. Facebook is also a platform, connecting advertisers to captive audiences.
The thing about platforms is that they are only as valuable to one side of the market as they are to the other. Economists call these network effects. The bigger the network, the more valuable joining the network is. And the more valuable the network is, the bigger it gets.
Without drivers, Uber’s value to passengers would be zero. If Amazon didn’t have any merchants, no consumer would browse Amazon’s page for products to buy. Without captive audiences, Facebook wouldn’t be of any use to advertisers.
It’s a virtuous or not-so-virtuous cycle, depending on your outlook. What’s less subject to interpretation, however, is that network effects give incumbent platforms a degree of market power that’s hard to ignore.
Consider Apple’s controversial app store.
Spotify complained years ago that Apple was abusing its market power, using its app store to “tax” developers that made competing products, such as Spotify, whose music-streaming app competes with Apple’s own.
The European Commission launched an investigation and recently published its preliminary view.
“Apple abused its dominant position for the distribution of music streaming apps through its app store, and distorted competition in the music streaming markets,” said Margrethe Vestager, the EU’s Commissioner for Competition.
The solution isn’t just open banking
If open banking is a huge success, triggering a Cambrian explosion of financial-services apps, that very success may undermine itself.
The federal government is currently operationalizing changes to banking law that will let banks engage in “financial technology activities” without regulatory approval. The list of activities is long and broad.
Banks will be able to more easily invest in and partner with technology companies. Banks will be able to behave more like technology companies themselves.
The app store for financial services, anyone?
Open banking may backfire and make the Canadian financial sector more concentrated and less competitive than it already is today. But it doesn’t have to.
To maximize the probability it doesn’t, competition needs to be our north star — and not just when it comes to the development and implementation of an open banking framework.
Our Competition Bureau needs teeth. Financial-sector policymakers and regulators need explicit mandates to promote competition and innovation, which they currently don’t have. In financial sector policy-making, competition and innovation have long taken a backseat to other public objectives, such as safety and stability. Even when a good idea comes about to promote competition and innovation, it takes years and years for the federal government to make it happen.
What Canadian financial sector policy-making and regulation need is a recalibration of their institutional and cultural DNA: competition and innovation need to matter. They matter in jurisdictions with world-class fintech hubs, such as the UK. There’s no reason why they shouldn’t matter here, too.
Then again, maybe there is a reason. Maybe the joke that Canada is a stack of oligopolies in a trench coat is funny because it’s true.