Risks and Opportunities of the Payment Services Law – the Competition Law Perspective

SÉRVULO PUBLICATIONS 14 Jan 2019

In November 2018, the new regulatory framework for Payment Services and Electronic Money was finally approved in Portugal, whilst implementing the Second Payment Services Directive (the so called “PSD2”)[1]. In October 2018, the Portuguese Competition Authority has published the final version of the Issues Paper “Technological Innovation and Competition in the Financial Sector in Portugal”, following a public consultation process (available only in Portuguese). The Competition Authority’s paper stresses the risks in the implementation into national law of the PSD2[2]. 

According to the Competition Authority, FinTech companies struggle with entry and expansion barriers in the provision of payment services and crowdfunding. Those barriers allegedly relate to the regulatory framework of the financial sector and to the market foreclosure risk by incumbent banks.

The main aim of the law on payment services is to provide an adequate and proportional regulatory framework that accompanies the disruptive changes brought by innovation. It is debatable whether or not the risks identified by the Competition Authority are dismissed by the referred legal framework or if additional measures are needed.

Firstly, the Competition Authority warns of a potential market foreclosure risk of FinTech’s, which is dependent on incumbents (banks) to access essential inputs, such as account data and banking infrastructure. Secondly, in the crowdfunding sector, granting FinTech operators access to the Central Credit Register would contribute to alleviate lending crowdfunding platforms’ deficiencies when compared to other financial institutions.

The main recommendations of the Competition Authority’s Issues Paper in the payments services sector pursuant alleged market foreclosure risks are the following:

• “PSD2’s operationalization: DSP2 and the regulatory technical standards (RTS) impose account data sharing between incumbents and FinTech entrants, and may therefore mitigate foreclosure risks. In this context, the Competition Authority recommends the Government to reduce the potential degrees of freedom in the obligation to grant access, in particular by ensuring (i) system interoperability, (ii) quality of access, (iii) non-obstruction in obtaining consent, (iv) the type and granularity of information, and (v) exemption of charges;
• Access to the central bank’s technical infrastructure: a technical solution that enables all service providers to access SICOI (the national clearing and settlement system) under equal conditions should be considered, thus eliminating their dependence on bank intermediation (Recommendation to the Bank of Portugal)”.

The main risks and barriers identified in the Issues Paper in the crowdfunding sector are the following:

• “National regulation imposes investment limits that several stakeholders regard as discouraging investment and limiting the sector’s expansion.
• Regulatory patchwork at the European level and absence of service provision rights for operators based in other EU countries.
• Impossibility of Central Credit Register (CRC) reporting by lending-based crowdfunding platforms”.

To tackle the referred risks and barriers the Competition Authority advocates the following recommendations:

• “Evaluation of the necessity and proportionality of investment limits, considering their elimination (Recommendation to CMVM – Portuguese Securities Market Commission).
• Possibility of granting service provision rights to platforms authorized in other EU countries under MiFID - Markets in Financial Instruments Directive (Recommendation to CMVM).
• Granting of CRC access and reporting rights to lending-based crowdfunding platforms (Recommendation to the Bank of Portugal)”.

In terms of regulatory regimes that promote innovation, the Competition Authority recommends the introduction of the so-called regulatory sandboxes: “these regimes promote entry through a temporary adaptation of regulatory barriers, enabling companies to test innovative products, services and business models in the market. This is done under the supervision of regulators, while safeguarding consumers’ interests and preserving the system’s security and integrity. In this context, the Competition Authority considers that a regulatory sandbox covering a broad range of financial services, based on a coordinated approach by the various sectoral regulators, would enhance the benefits of the regime”.

In July 2018, the three regulators of the financial sector – the Insurance and Pension Funds Supervisory Authority, the Bank of Portugal and the Portuguese Securities Market Commission – in cooperation with the association Portugal FinTech announced the launching of “Portugal FinLab”. It is a communication channel between innovators – new players in the market or incumbent institutions – and the said Portuguese regulatory authorities. Through it, regulators provide guidelines to the participants on how to navigate and operate in the regulatory system. Interestingly, the launching of the “Portugal FinLab” innovation hub and the recent market developments already witness a change in the FinTech’s landscape in Portugal. At the time of writing the Bank of Portugal authorized several FinTech companies to operate, such as Raize, Paypayue, MaxPay, IfthenPay, PT Pay, Easypay, SIBS, or Payshop.

It is still not clear on whether the concrete application of current legal framework, the “Portugal FinLab” innovation hub and market-based approaches are sufficient to reap the fruits of the new technologies applied to the financial sector in terms of increased competition, innovation and consumer welfare. The gap between regulation and competition may exist, if proper conditions are not adopted or respected by the incumbent banks. It is early to say whether regulatory provisions are sufficient to prevent any or all “potential market foreclosure risks”, or whether the sandboxes are needed to diminish alleged barriers to entry and expansion in the financial sector, without first assessing the full implementation of the PSD2. To sum up, the new legal framework represents to both banks and FinTech/InsurTech companies a catalyst to present a differentiated strategic response to the challenges ahead. 

Alberto Saavedra

as@servulo.com