By Nathan Lynch, Asia-Pacific bureau chief, financial crime and risk, Thomson Reuters
It’s no secret that Australians love to hate their banks. Could a “two-phased” bank licensing regime drive a new era of consumer-driven innovation in the sector?
In the past decade only one genuinely new bank has been granted a deposit-taker’s licence in Australia. One! Is it any wonder that we have one of the most concentrated and least innovative banking sectors in the world? As RBA governor Philip Lowe said recently, barriers to entry are the enemy of bank competition and innovation.
“Inevitably competition comes from the new entrants. It is not likely that all of a sudden existing incumbents will decide to compete a whole lot more aggressively,” Dr Lowe told a parliamentary review of the big four banks.
In the UK, meanwhile, 14 new and innovative “banks” have launched in the past three years. Another 20 start-ups are in talks with the Prudential Regulation Authority (PRA) about obtaining a restricted banking licence.
So what is the key difference in this tale of two financial centres?
From sandstone to sandboxes
In 2013 the UK regulators took the bold view that start-ups, fintech and innovation would be the drivers of banking in the digital economy. In an era of disruption they recognised that banking was making an inexorable transition from being a “place you go” to a service you use. Consumers in the UK today are more interested in their bank’s app features than the intricate detailing on their sandstone “high street” facades.
Martin Wheatley, who was chief executive of the Financial Conduct Authority (FCA) at the time, said encouraging start-ups was the secret to fostering innovation and giving consumers greater choice.
“Newcomers to the market bring fresh thinking and challenge established firms to consider how they can offer a better deal or improve the service they offer,” he said.
Two-phased approach
So how did the UK regulators help these new players to scale the notorious barriers to entry in the banking market? The secret was their experiment with a “two-phased” bank licensing regime.
A two-phased licensing process allows new entrants to obtain a “restricted banking licence” and start providing services while they raise further capital and invest in IT and other infrastructure. It’s similar to the “sandbox” model that conduct regulators have recently embraced. Start-ups that take advantage of this licensing relief have one year to raise the necessary capital, hire staff and invest in their technology and compliance systems. If they can do this they graduate to a full banking licence at the end of their first year.
The UK experience has shown that start-ups find it much easier to raise capital once they have an active banking licence in place.
Barriers to entry
The recent parliamentary review of the four major banks in Australia, led by federal MP David Coleman, said regulators should review the bank licensing regime to determine whether it is acting as a barrier to entry.
The review found that, unlike the UK, Australia’s start-up banking sector was “effectively non-existent”.
The good news is that the Australian Prudential Regulation Authority (APRA) has taken heed of this key recommendation from the Review of the Four Major Banks.
Wayne Byres, chairman of APRA, told a roundtable in Melbourne this morning that his agency was looking into a similar licensing model for Australia.
Byres said the main sources of innovation and competition in the banking sector were coming from non-ADIs, which were competing directly with regulated entities. APRA does not have oversight over non-ADIs (such as fintechs and shadow banks), which can create regulatory arbitrage if they are not brought inside the tent.
“We are considering the benefits and risks of adopting a two-phased approach to licensing for certain types of new entrant,” Byres said. “Such an approach could bring new sources of competition by allowing new entrants time to establish the full complement of resources and systems necessary to be able to comply with all aspects of the prudential framework.”
Consumer protection is key
APRA is acutely aware of the need to ensure any deposits that are placed with these new entrants are safeguarded. It does not want to create a situation where new entrants put depositors’ funds at risk, which could damage confidence in the entire sector.
The prudential regulator is quietly hopeful, however, that a two-phased licensing regime will encourage the incumbent banks to be more innovative and embrace technology.
“We are very keen to see investment in new technology by financial firms — both newcomers and existing players,” Byres said.
If Australia fails to embrace these challenges and opportunities it will not just be to the detriment of consumers. It will also condemn the country to being a backwater of banking cronyism and unimaginative payment services, while the overseas tech giants gnaw away at the domestic market. Without doubt, as the major overseas tech companies move from payments into fully fledged banking, they will have the resources and talent to challenge the “big four” players.
On the other hand, if APRA succeeds with two-phased licensing, there is a lot to be optimistic about. With a more flexible licensing regime Australia may be able to support a local fintech community that not only builds innovative products targeted at the local market but also exports those services to the rest of the world. Examples such as Atlassian, Xero, Tyro Payments and SocietyOne show that the antipodean tech sector can take on the world.
With a banking sector driven by competition, customer needs and innovation, there is no reason why Australians can’t regard their bank as an ally — a business partner, a financial facilitator and an innovative service provider.
New face of banking
Excuse the colloquialism but Australians have a long and proud history of hostility towards the “two-faced” banks. This goes back to events such as the eviction of farmers from their properties during the Great Depression. For a few weeks between cricket and footy season each year, bank bashing is our de facto national sport.
The prime minister and treasurer exploited this hostility, quite unashamedly, with the introduction of a “stealth” A$6.2 billion big bank levy in the latest federal Budget.
As ANZ chief executive Shayne Elliot put it during a Budget post-mortem, the banks had made themselves an “easy political target”. He said the passage of the levy — with barely a whimper of opposition from the public — showed that banks needed to transform their relationship with their customers.
The world of banking is changing and the banks need to change with it. Digital delivery of services is transforming the way that younger consumers view financial services. The Instagram generation’s consumer behaviour is strongly aligned with technology — they want dynamic, personalised services delivered through mobile devices wherever they are in the world.
In this brave new world of banking, customers will embrace ADIs that offer services that are frictionless, convenient, well-designed and customer-centric. They have little interest in standing around in sandstone foyers waiting for a teller.
The question is whether this competition will come from home-grown start-ups and innovative teams within the incumbent banks or from overseas fintech success stories.
Moreover, if a two-phased banking regime takes off, is it possible that Australians could ditch a century of proud tradition and actually come to like their banks?