Productivity commissioner cools talk of ‘banking revolution’

In his recent address to the Melbourne Money and Finance Conference 2018, commissioner Stephen King argued that the impact of digital disruption and technology in the banking sector would be “evolutionary, not revolutionary”, despite some observers warning that traditional lenders may be “left behind” by the “tsunami of change”.

“Banking, it is claimed, is facing a period of disruption and uncertainty,” Mr King said.

“Technological advances, it is argued, will transform the industry and sweep away old institutions.

“Alas, I am here to deliver the ‘damp squib’. It is my sad duty to say that the banking revolution is not around the corner.

“While there will be technological change that will improve services and benefit customers, this will be evolutionary, not revolutionary.”

Open banking

Despite stating that it “will not be a big bang”, Mr King noted the benefits of open banking, driven by Australia’s Comprehensive Credit Reporting (CCR) regime, which he claimed would enhance competition in the sector and lead to the production of “bespoke” financial products , tailored to customers’ needs.

“The basic idea is that customer-specific information drives bespoke products and personalised pricing. If only one bank has a consumer’s information, then they can offer a bespoke product. But they will do so at a high price,” the commissioner said.

Mr King continued: “With information symmetry, producers can compete on both the bespoke product and the price. Competition moves into overdrive and consumers end up significantly better off.”

However, the commissioner stated that some customers may be “worse off” in an open data environment.

“In some markets, such as insurance markets and lending markets that are subject to adverse selection, better information can make some customers better off but makes others worse off,” the commissioner said.

“For example, if driver data is automatically collected by car companies but then passed on to insurers, good drivers will generally find they get offered better insurance at a lower price. But drivers revealed as poor risks by the data may find that their price of insurance rises.”

Mr King also observed that the open data regime may “alter the incentives of banks to collect data in the first place”.

“For open banking, the focus is on account and transaction data. Financial institutions need this data to provide the relevant products, so there is little risk that the data will not be collected,” Mr King noted.

“Importantly, open banking does not apply to value-added data, where a bank has worked with customer data creating larger data sets that, for example, allow it to better manage its whole-of-business risk.

“As the broader consumer data right spreads, the clear distinction between customer data and value-added data must be maintained to avoid creating perverse incentives.

“Of course, there is a trade-off. By limiting the scope of shared data, the competition benefits from reform may also be limited.”

Further, Mr King called for greater flexibility from financial regulators so as to encourage innovation in the sector and drive the production of products that are catered to a consumers’ needs.

“In banking, regulation is significant and necessary for prudential stability. But this regulation may impede the type of bespoke products that open banking is designed to incentivise,” Mr King added.

“To get the full benefits from open banking, regulations must be flexible enough to allow financial institutions to be innovative in their product offerings.”

 [Related: ‘Laggard’ lenders to be left behind: Moody’s]