The Productivity Commission’s draft report into competition in the Australian financial system says we lack robust price rivalry, that FinTechs and neo-banks should have better market access, and that the new instantaneous transaction system being rolled out must not become a cosy club for established banks.
The Commission says the current system lacks “strong price rivalry” and that the quest for stability especially since the GFC could be part of the problem.
“The benefits of competition to the individuals and businesses for whom the financial system exists are being reduced in the quest for stability,” the report says.
“Regulators have focused almost exclusively on prudential stability since the Global Financial Crisis, promoting the concept of an unquestionably strong financial system.”
We have myriad finance products the report says, but price competition among those products is more of a phony war around marketing than a real contest based on price and genuine innovation.
“Competition in quality of services — effective use of technology to better price risk, responsiveness to demand shifts, simpler and cheaper processes — is not so constrained,” the report says.
“But much of what passes for competition is more accurately described as persistent marketing and brand activity designed to promote a blizzard of barely differentiated products and white labels.”
“Compared to banks overseas, Australia’s banks offer products that have comparatively low fees but give the banks moderately high interest margins.”
Meanwhile, the proliferation mortgage brokers and advisors over the last twenty years has done little to foster competition.
“The growth in mortgage brokers and other advisers does not appear to have increased price competition. The revolution is now part of the establishment,” the report said.
“Non-transparent fees and trailing commissions, and clear conflicts of interest created by ownership are inherent. Lender-owned aggregators and brokers working under them should have a clear best interest duty to their clients,” it says
While the report declares the entrance of fresh finance players like FinTechs and neo-banks won’t solve our finance product price competition problem, it will help, and the report seeks to ease the way in for new players.
A draft recommendation in the report is that the Australian Prudential Regulation Authority (APRA) and the Federal Government “should prioritise reforms that reduce regulatory barriers to entry and expansion in banking”, by the end of the year.
Eric Wilson is chief executive of Xinja which bills itself as the first Australian neo-bank. These have no bricks and mortar branches, use apps as the customer interface, and are unburdened with ancient code deep in their guts such as the antique Hogan banking system that still underpins many old line banks.
Xinja launches its first cash card product later this month and aims to obtain a banking licence and enter the deposit taking banking market mid-year.
Mr Wilson says Xinja’s hero product will be a mortgage system capable of issuing an approval in twenty minutes.
“We all know its time for a lot more competition in the Australian financial services industry. We were very happy to see that the Commission recognised that, and that the way to go forward was to encourage new banks like us.
“We would love to see more neo-banks and hope that there will be four or five of us in the next two or three years.
Mr Wilson says there are many assumptions made about the Australian banking market that make it an oligopoly.
“If we break that oligopoly by having serious digital players in the middle, then I think that changes all the assumptions.”
He points to the US where half a dozen neo-banks are already in the market, with three of those having grown to major player scale such as the app-based Monzo, which was founded in 2015 and now has half a million customers.
“These genuine players that are getting that kind of uptake because they are changing the market,” he says. “They are offering better products, better service and better technology.”
On the new technology front the draft report aims to ensure that the New Payments Platform (NPP) does not become a cosy club for established players.
The NPP is rolling out this month and puts an end to the three day delay involved in transferring money between banks.
Consumers can score a new finance credential from participating banks called a PayID, which does away with BSB and account numbers when making payments to other accounts.
There some 60 members of the NPP at launch, including the Big Four and the report notes that the NPP is not subject to an access regime imposed by the Payments System Board or an access undertaking accepted by the ACCC.
“An access regime (or undertaking) can facilitate third party access to services provided by significant infrastructure facilities with natural monopoly characteristics,” the report notes.
“Access regimes are rarely used, but where they are, it is generally for a good reason: they are enforceable by the regulator and the asset involved is of national economic significance.”
“The Commission also considers that there is a strong case for pro-active intervention to avoid both uncertainty and potential anticompetitive behaviour. The NPP is a significant piece of national infrastructure and more transparency and regulation around the process for access is needed to avoid conflicts of interest unduly restricting competition,” the report says.
NPP transaction fees should be closely monitored by the Reserve Bank, the report says.