Moody’s questions effectiveness of PC recommendations

The credit ratings agency has said that it does not expect the Productivity Commission’s recommendations concerning competition in the banking sector to cause “drastic change” to market concentration.

The PC’s recommendations, outlined in its final report released to the public on 3 August,, included:

•  Expanding the scope of [financial] products eligible for testing under the Australian Securities and Investments Commission’s (ASIC) regulatory sandbox, to include prudentially regulated fintechs
• Enable the full suite of rights for consumers to access and use digital data through the proposed Open Banking system
• Providing the Australian Competition and Consumer Commission with a mandate to champion competition

In its analysis of the recommendations, Moody’s acknowledged that such measures, like the PC’s call for the increased availability of data, would improve consumer awareness of smaller authorised deposit-taking institutions (ADIs), but claimed that the impact on competition would be “limited”.

“If implemented, the measures to lessen information asymmetry could benefit small ADIs’ brand awareness, one example of the benefits arising from the recommendations,” Moody’s noted.

“This is important when some consumers are not aware of alternative services and prices available from smaller institutions that may be more suitable for their circumstances.”

The ratings agency continued: “However, these ADIs’ small size would likely make the effect on major banks limited and gradual. For example, a doubling of the loan market share of the entire mutual sector, which comprisies the bulk of smaller ADIs, would result in a decline in major banks’ market share of only three percentage points.

“As a result, we do not expect a drastic change to the concentrated structure of the country’s banking system for the foreseeable future.”

Moody’s also highlighted the “high degree of pricing power” afforded to the big four banks, which it said account for 79 per cent of total system assets.

Moody’s added: “The next five largest lenders combined account for a further 10 per cent of banking system assets, while the rest comprise a long list of smaller ADIs, many of which are mutually owned.”

Further, the ratings agency stated that the PC’s call to lower barriers to entry for fintechs would not have an immediate impact on competition, noting that non-ADIs have a “different focus”.

“We do not expect increased competition from non-ADIs to quickly crowd out smaller ADIs because most fintech firms focus on less regulated services, such as small-scale fund management and payments services.

“Fintech firms have a different focus than small ADIs, whose core business revolves around retail deposit gathering and residential mortgage lending.

“Furthermore, mutual ADIs typically have strong community connections with the specific region or professions on which they focus. This, together with favourable lending rates, will continue to support ADIs’ franchises.”

However, Moody’s said that it expects fintechs to challenge established ADIs in the longer-term, as consumer expectations evolve.

“Over the longer term, we expect that the growth of fintech lenders will present a greater competitive challenge to established banks, and particularly smaller ADIs, because their weaker profitability and efficiency will make it more difficult for them to maintain the pace of technological change that consumers are likely to expect.”

[Related: Former PM urged RC to consider ‘contribution’ of banking sector]