Regulator opens discussions on looser bank entry restrictions
(18 August 2017 – Australia) The Australian Prudential Regulation Authority (APRA) has released a discussion paper on proposed revisions to the licensing framework for authorised deposit-taking institutions (ADIs). APRA is consulting on proposals to introduce a phased approach to authorisation, designed to make it easier for applicants to navigate the ADI licensing process.
The phased approach is intended to support increased competition in the banking sector by reducing barriers to new entrants to be authorised to conduct banking business, including those with innovative or otherwise non-traditional business models or those leveraging greater use of technology. The purpose of the new Restricted ADI licence is to allow applicants to obtain a licence to begin limited operations while still developing the full range of resources and capabilities necessary to meet the prudential framework.
In facilitating a phased approach, APRA still needs to ensure community confidence that deposits with all ADIs are adequately safeguarded. APRA also needs to ensure that any new approach does not create competitive advantages for new entrants over incumbents, or compromise financial stability. Therefore, reflecting their relative infancy, Restricted ADIs will be strictly limited in their activity and would not be expected to actively conduct any banking business during the restricted period.
APRA Chairman Wayne Byres said: ‘APRA’s proposed changes to its licensing approach are intended to deliver benefits to the community through facilitating increased innovation and competition in the banking industry, while still maintaining a resilient, sound and stable financial system.’
APRA invites written feedback from interested stakeholders on the proposed phased approach to ADI licensing by 30 November 2017. Following consideration of submissions received through this consultation, APRA anticipates it will release the final approach to phased licensing for ADIs, and additional guidance material for applicants, in the early part of 2018. In the meantime, APRA encourages new applicants, where applicable, to discuss with the licensing team whether the general approach outlined in this paper could be applied to their assessment.
Similar approaches are currently implemented in Europe and the US were challenger banks are rapidly gaining a firmer foothold as fully fledged new authorised deposit taking institutions (ADIs). Following recommendations to increase competition tabled by the Financial Services Inquiry (FSI) and government’s Standing Committee on Economics, APRA is seeking to foster greater innovation and positive customer outcomes balanced against continued financial system resilience and stability.
East & Partners confirms market share is concentrated among the Big Four, broadly matching APRA’s monthly banking statistics for deposit and lending volume market share. Based on direct interviews with 1,500 SMEs, three quarters of the SME segment nominate a Big Four lender as their primary source of credit (74.9 percent), rising to over 85 percent when combined with subsidiaries. This figure is relatively unchanged over the last five years despite the growth of online non-bank lenders in the space. SMEs bank in a holistic way and are reluctant to ‘multibank’ for business banking products and services where possible, despite the potential for improve service or pricing competitiveness.
In that sense, SMEs continue to prefer parking their cash with the Big Four with aggregate transaction banking market share currently sitting at 76.1 percent. Big Four transaction banking market share is closer to 85 percent in in the mid-market and institutional segments despite recent market share advances by international banks such as HSBC, Citigroup and major Chinese and Japanese banks according to East & Partners latest research.
The SME segment is predicted to react the most actively to lowered barriers to entry. Currently just over one in five SMEs are considering switching to a new transaction bank in the next six months (22.6 percent), with most of those citing changed terms and conditions or a direct approach from competitors as the main reason for switching. Of the eight in ten SMEs not switching, the dominant driver is high service satisfaction, suggesting any decline in current service standards would result in a sizeable lift in SME switching intentions. This is a clear ‘pain point’ that new entrants and smaller sized ‘challenger’ banks are clearly seeking to leverage through the application of time saving fintech solutions and smaller scale to better serve ‘lonely’ small businesses.
Larger sized corporates are also committing greater spend to new financial technology and platforms, evidenced by East & Partners Fintech Adoption Index that suggests receptiveness to non-bank competitors for a broad range of commercial banking needs is exceptionally high. In Australia Internal Access Systems (and Core Enterprise Resource Planning (ERP) platforms are the key focus areas.