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

Financial technology, commonly referred to as “fintech,” is causing significant disruption within the financial sector, and this disruption is proving to be advantageous. Fintech services are driving a digital transformation in finance, rendering it more accessible and user-friendly. As a result, transaction costs have diminished, while levels of competition, innovation, and financial inclusivity have surged.

However, the ascent of fintech has brought along a familiar refrain of “embrace the favorable, restrict the unfavorable” rationale, a pattern that has prompted numerous previous instances of regulatory intervention. While these regulations may be well-intentioned, they often give rise to unintended repercussions.

Notably, regions such as the European Union, the United Kingdom, and Latin American countries like Mexico, Chile, and Colombia have all ratified regulations pertaining to “open banking” (or its more ambitious form, “open finance”). These regulations entail a type of “interoperability” mandate, necessitating that traditional financial institutions share information or infrastructure with their technological counterparts. Similar bills and proposals have also been debated in several other nations. Given their widespread adoption, it is pertinent to delve deeper into the foundational principles and potential outcomes of these regulatory initiatives.

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