Data is the new competition (Part 3)

I have been exploring the various conceptions of data in posts 1 and 2, through metaphors various people have used to describe it. Clive Humby called it "the new oil" (i.e. very valuable) but Tim O'Reilly said it's more like silicon, since silicon, a form of sand, requires lots of effort to make it desirable. So, for him data is “the new sand”.

Yet in the end, O'Reilly admitted that this new metaphor does not adequately convey the impact of data on our lives. Pointing at social media serving up divisive news stories during the US elections, discrimination by algorithms and "unfair competition", he compared it to a drug: “data” is also the new “Oxycontin”.

But O’Reilly never explored data’s potential role in “unfair competition” in any detail, which is a pity. The evidence is piling up. Under what conditions does data become a centralising force and anti-competitive – something that should matter to us a great deal.

In their seminal book, "Competition and growth", Philippe Aghion and Rachel Griffith demonstrated that companies innovate to escape competition. But, they add, innovation can cease if companies manage to escape competition. Paypal co-founder and Facebook investor Peter Thiel presents a similar argument in his book Zero to One. Founders should try to become monopolistic to dominate an industry, according to Thiel. Competition, he says, is for losers.

The banking industry has been accused of many things. But rarely has it been described as being for losers. Yet it is an industry in which consumers have a choice. Even though there has been consolidation in banking for years, the US today still has over 4,300 banks. Europe has just over 6,000. Of course, even in the US, few banks compete in every state. European banking markets are even more fragmented. That’s because in Europe regulations like deposit insurance are national: behind every bank individual depositors (usually up to 100k) stands a national regulator and government in case of crisis.

But the point stands, no country in Europe or state in the US has a lack of banking providers. Part of the reason for this is that most banks' services are built around a form of money that cannot be monopolised. As long as central bank issued cash still exists, and retail banks like Santander keep reserves with a central bank, the money we are entrusted with is a central bank's liability and, therefore, belongs to the public. This is one fundamental reason regulators took such a dim view of Facebook's Libra Digital currency proposal. It would have amounted to a proprietary digital currency.

So sure, there are barriers to entry into banking, including demanding regulation as well as supervised, and how much capital you can raise and at what cost. Banks compete in many ways, those considered prudently managed and efficient have more flexibility in offering different interest rates and charges, offering different levels of customer experience, range, diversity, and ease of use for their services.

I would be disingenuous, however, if I did not confess that banking has had a reputation for being sticky. In the past, once a customer used a bank as their main bank account, they tended not to switch that easily. Trust is one of the reasons for this inertia. If you have entrusted your money to a company for a while and they have delivered, you may be reluctant to try someone else.

To encourage innovation, competition, and the expansion of a single payment market in the European Union, the EU passed the Payment Service Providers Directive (PSD). PSD2 was first incrementally implemented in law in the UK in 2018 and became known as “Open Banking”, and more recently in Spain. Thus, third-party service providers including non-banks can access customer data from EU and UK banks if they are given permission by the customers.

In the wake of Open Banking, several budgeting services have emerged that allow users to aggregate all their financial data from various banks in one place. We already offer this service in Openbank Spain. After a slow start, the pandemic has turbocharged Open Banking. There were 11 million Open Banking payments in the UK between February and August 2021, compared to just 700,000 in all of 2020.

One of the features of “Open Banking” is that it allows customers to switch banks accounts literally by pressing a button. Account information including any direct debit and standing orders are automatically transferred between accounts. In the case of a payment made to your old account by a debtor or friend, the Open Banking system automatically routes the payment to your new account.

But you may well wonder if developments in banking shed any light on the wider debate about data? I think so yes. In my final post of this series, I will explain how data's unique qualities also hold the key to our economies' stagnation or flourishing - depending on how we utilize it.?

?#data #competition #innovation

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Data is more than the new oil (Part 1)

Data is the new drug (Part 2)

Data is the new oxygen (Part 4)