Releasing the power of consumers in regulating innovation in the digital age

We, users and consumers, play an increasingly central role in the process of digital innovation, now that innovative companies have nearly limitless capabilities to capture and use our data. Therefore, there should be a more demand-conscious approach to regulation of digital products and services, argues Nikita Divissenko in his new book “Regulating Innovation in the Digital Age”.

Supporting digital innovation is a core objective of several recent EU regulatory interventions. This regulation of innovation largely focuses on the supply side: it enables innovative newcomer companies to enter the market, levels the playing field by obliging incumbent market actors to share users’ data with newcomers, and tackles market fragmentation across national borders within the EU. The book discusses some of the most recent regulatory tools such as the Digital Markets Acts (DMA), the Open Banking framework under the Payment Services Directive (PSD2), and the Artificial Intelligence Act (AI Act).

“This pro-innovation and pro-competition regulation is all about creating more choice for consumers”, says Nikita Divissenko. For example, the DMA requires “choice screens” on IOS and Android devices to offer us a choice of a default browser. It also requires service providers to introduce a consent-based choice mechanism to enable interoperability between messaging services.

Providing consumers with greater choice is beneficial for competition and growth. But regulation that aims at shaping innovation should also engage with the quality of those choices, not just the quantity.

Similar consent-based requirements have been used in the Payment Service Directive 2 (PSD2), where users can now require banks to share their account data with third-party service providers in order to get new alternative options for online payments or for managing their finances. “Providing consumers with greater choice is beneficial for competition and growth. But regulation that aims at shaping innovation should also engage with the quality of those choices, not just the quantity.”

The value we give to convenience

The demand-centred regulation proposed in the book suggests a framework for rethinking the way the regulation is designed and implemented to account for the role of users and the quality of user choices for innovation. “Co-regulation, widely used for regulating innovative markets in the EU, leaves too much control over the shaping of user choices and preferences to suppliers”, says Nikita Divissenko. This includes the value we give to convenience of new digital products and services, or our perception of risks associated with the new technology. Despite the obligations imposed on service providers, and the rights and choice options given to consumers, the regulation often perceives the latter as passive receivers. “If we want to effectively regulate digital innovation, we need to do more to have consumers engage and not remain as passive data donors for the economy”. The book invites regulators and policymakers to revisit the delegation of implementation of regulatory tools to suppliers under the co-regulatory arrangements, and also discusses the use of behavioural insights and technological regulation.

Efforts beyond regulation

The book acknowledges that there are limits to regulation as a tool for shaping innovation. “We need more clarity about what can be achieved by creating new rules for these innovative markets”, says Nikita Divissenko. While discussing the regulatory limitations, the book emphasises the need to pursue efforts beyond regulation. “Digital literacy, education, and consumer awareness are crucial for promoting responsible and sustainable innovation, especially with the rise of AI-enabled products and services.” The demand-conscious approach suggested in the book serves as a valuable guide for stepping up the EU’s game in regulating innovation for the benefit of consumers.