Banking News

Competition not enough to unseat Big Four - Productivity Commission

(28 November 2018 – Australia) Challenger lenders pose no real threat to the major banks despite their aspirations to dismantle the long-standing oligopoly, according to Productivity Commissioner Stephen King.

 His comments come as he views the major banks as failing to be legitimately challenged by aspiring disruptors in several areas, saying that the big four will ultimately “gobble up anything that is innovative”. Speaking on a panel at the Australian Payment Summit in Sydney the commissioner elaborated that “If you take Macquarie and every other ADI and add them up by the value of their balance sheet assets, you only get to the size of Westpac or CBA. If you put them all together, then you might have a challenger to one of the big four and that’s not going to happen. There is competition, and it’s really important competition, but it’s around the edge. Don’t expect a revolution.” Given the widespread adoption of contactless payments Mr King believes it’s going to be difficult for challengers such as digital wallet providers including Google, PayPal, Android Pay and Apple Pay to displace incumbents. “A reduction in cash is all driven by the traditional credit card - it’s not driven by a new payment instrument.”

APRA General Manager of licensing Melisande Waterford said competition was “not just about numbers”. ‘Neobanks’ with alternate business models have a “completely different mindset and a different approach to providing a service” that the major banks would have difficulty replicating because of their legacy systems and frameworks. “I think the actual competition that is starting, it’s not just about numbers. It’s actually that there is going to be a different service on offer. If you look at some of the international players, some of the fintechs have [gotten] very big very fast if they’ve nailed their offering.”

While APRA is compelled to ensure there is a clear pathway for new products and business models to enter the market, the regulator needs to be cautious because a failure in the early stages will arouse concern towards new entrants and ultimately stifle competition. The regulatory framework for purchased payment facility providers (PPFs) was designed in 2006 when there weren’t many examples of new types of products and business models available to base the framework on. “We now have examples in front of us. It’s the ideal time to review the framework because you’re not just reviewing it with one business model in mind. You’re trying to get a framework that actually applies to a large number of business models. From APRA’s perspective, we’re open to a variety of different business models – whether PPFs come with QR codes or whether they come as a digital wallets. As long as people can meet our standards, we can help people get through. We don’t have a particular business model that we’re trying to push.”

APRA has been criticised in Royal Commission hearings which concluded last week, in particular it’s overlapping role with the Australian Securities and Investments Commission (ASIC). APRA Chairman Wayne Byres said he was prepared for more criticism that the lines of regulatory responsibility between the two regulators are getting more blurred. With APRA and ASIC under growing pressure to be more accountable and transparent for decisions, Mr Byres said he was open to a "capability review" being conducted on APRA, as has been done on ASIC and as recommended by the 2014 financial system inquiry. "We think we can work together ... As we step in more to looking at factoring in issues of misconduct and ways to mitigate against misconduct into the prudential regime, I'm sure we will get more criticism and more concerns expressed about the blurring, and we will need to work together to see how that can best be done."