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Romanian Competition Council’s preliminary conclusions on the retail banking sector inquiry launched in 2016

November 2018 – Following the adoption of EU Directive (EU) 2015/2366 of the European Parliament and Council of 25 November 2015 on payment services in the internal market (“PSD2”), the Romanian Competition Council (the “RCC”) launched in 2016 a comprehensive study of the Romanian retail banking market.

PSD2 is expected to fundamentally change the way payment and account information accessing operations are performed by eliminating the monopoly that banks currently hold over their customers’ banking data. PSD2 allows third-party payment service providers (“TPPs”), such as fintech companies, to enter the market. For this to happen, banks must ensure TPP access to their payment infrastructure and client data through application programming interfaces (“APIs”) for the latter to eventually develop information and payment services as well as other financial services targeting banking customers.

Although requiring banks to open their client databases to fintech companies, PDS2 does not specify the method to achieve this, which allows the national authorities to opt for the solution that best suits local market requirements.

Through its analysis, the RCC observed that banks in Romania are currently free to offer services using their own API, which has the effect of stifling integration and communication between TPPs and banks. Moreover, developing, implementing and managing so many interfaces could prove inefficient for TPPs, resulting in them preferring banks with the most customers over banks with a reduced client portfolio. It is in this context that the RCC put forth its recommendations.

1 RCC recommendations on PSD2

1.1  Common API

The RCC recommends adopting a common API for the entire Romanian banking system. This solution, the RCC argues, has certain advantages, such as:

  • Simplifying the process of market entrance for service providers. Separate APIs could be considered as a barrier to entry by allowing access only to those providers capable of developing and managing a considerable number of APIs, which would eventually limit the number of service providers that customers can choose from;
  • The same level of security for all banks, which would translate into a more efficient system for security control management;
  • A more dynamic authentication of Payment Initiation Service Providers (“PISPs”) and Account Information Service Providers (“AISPs”);
  • Simplified implementation for both banks and TPPs;
  • Reduced costs for banks; simplified access for fintechs;
  • Reduced costs for implementation, testing and maintenance for both TPPs and AISPs; and
  • Reducing the risk of fragmentation at the European level and encouraging innovation.

The RCC acknowledged that its solution presents certain disadvantages, such as:

  • Financial disadvantages: adapting a bank’s software architecture to a common interface requires redirecting additional resources to supplement the core banking system;
  • A more complex amendment process (including for system security) followed by their concurrent adoption as a result of the many participants in this system;
  • Possible monopolistic behaviour at the national level of software developers;
  • Difficulty to agree on a common standard and on its subsequent development; and
  • If a common standard is agreed upon and implemented at the national level, banks might face difficulties synchronizing and integrating that standard into the one used at their group level.

Despite its disadvantages, the RCC identified certain advantages that a common API would bring for consumers:

  • Superior-quality services (accessibility, quicker responses from banks to TPPs).
  • Facilitating TPP market entrance, which is expected to increase competition and offer diversity; and
  • Access to innovative services.

The RCC acknowledges that establishing a common API at the national level would require making decisions on the following issues:

  • The local entity that will coordinate the process of API implementation as per PSD2; and
  • The entity that will be designated to provide financial resources for this project.

1.2   RCC recommendations for PSD2 transposition at the Romanian level

In general, RCC recommendations for PSD2 transposition are aimed at simplifying payment services operations. The RCC suggests creating a simple mechanism for consumers to grant and revoke their consent when using banking platforms. They also recommend adopting a clear and non-discriminatory certification process to be observed by the certification authority when dealing with new payment services providers.

2    RCC recommendations on banking services comparison websites

Here the RCC recommends that a standard reporting format be agreed at national level between banks, non-bank financial institutions and their respective associations that supports automatic data processing by comparison websites. Interested market participants should agree on an alerting mechanism that would allow the comparison websites to synchronise their content with the most recent relevant banking information.

The RCC notes that consumers greatly benefit not only when there is competition between products and service providers, but also between comparison websites. The RCC’s market study revealed that, despite the evident benefits these websites bring to consumers (e.g., cost reduction, time saving, informed decision-making etc.), consumers rarely use such. Quite counter-intuitively, the research shows that consumers find such websites to be unreliable, while still considering them to be fairly useful.

In its report, the RCC stresses that comparison websites can also bring palpable benefits to banks by enabling them to compare offers, which should strengthen competition. By using this service, banks should also incur lower costs than when using other sales channels, as online comparison platforms provide a lower-cost method for banks to increase their client portfolio and sales volumes. The RCC views this formula as a reduction of market-entry barriers by lowering marketing costs and allowing innovation (through redirecting the marketing budget).

The RCC concludes that online comparison platforms could increase market competition between larger and smaller competitors, which, ultimately, should benefit consumers.

3    RCC recommendations on loan refinancing absent any scoring exercise

The RCC examined the RON conversion of CHF loans through restructuring operations within the same bank and concluded that a similar procedure for such loans refinanced by a bank other than the bank that initially made the loan could ultimately benefit both consumers and the banks. According to the RCC, this mechanism of loan refinancing without undergoing a scoring process by the second bank could increase market competition.

4    Entry barriers

The leading barriers to entry identified by the RCC in its report were (i) territorial branch networks and (ii) client inertia.

4.1   Territorial branch networks

The RCC market study indicates that a bank’s network of territorial branches retains its essential role in attracting and maintaining customers. For certain banks, their branch networks are in fact the only method for supplementing their client portfolios. The study also revealed that fewer customers were attracted through other methods (e.g., Internet banking, phone banking etc.).

However, the RCC acknowledges that there is a growing trend at both the international and national level towards increasing the importance of digital channels for banking services (e.g., Internet banking, mobile banking), which is corroborated by a discernible decrease in the size of territorial branch networks.

The persistent relevance given by customers to territorial branches led RCC to make the following recommendations:

  • To improve customers’ financial literacy and direct them towards digital sources of information (including online comparison platforms); and
  • To promote innovative financial services offered by banks, non-bank financial institutions, fintechs etc. and use the online tools available to this end, which can be a substitute for the lack of territorial branches in certain geographical areas.

4.2   Customer inertia

The RCC market study revealed that, between 2013–2016, none of the interviewed banks registered any requests from customers to change their banking services provider. Consequently, the RCC observes that, at the Romanian level, customer mobility is reduced. The RCC notes that at the national level there were only two schemes aimed at increasing customer mobility: one adopted in 2010 that could be voluntarily adhered to by banks, and a mandatory scheme adopted in 2017.

Based on these findings, the RCC makes the following recommendations:

  • To facilitate the possibility for customers to change financial service providers by either creating an authority with jurisdiction in this field or by appointing an already existing institution to act on this matter;
  • To establish and implement a similar mobility scheme available to self-employed persons (Romanian “persoane fizice autorizate”, “PFA”) and SMEs; and
  • To inform customers about this procedure through a variety of information channels (including the Romanian National Authority for Consumer Protection, ANPC) so that customers can learn about this possibility and opt for it when deemed suitable. The RCC presents this as way to resolve the palpable lack of financial literacy among consumers in Romania.

For more information, contact Iustinian Captariu, Partner, at

e-mail

, and Theodora Stoica, Associate, at .