Big four will ‘gobble up’ challengers: PC commissioner

Stephen King from the Productivity Commission (PC) remains unconvinced that the major banks will be challenged by aspiring disruptors, saying that the big four will ultimately “gobble up anything that [is] innovative”.

Speaking on a panel at the Australian Payment Summit in Sydney on Tuesday (27 November), the commissioner explained: “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.”

However, Melisande Waterford, the general manager of licensing at the Australian Prudential Regulation Authority (APRA), who was also a panellist at the summit, said competition was “not just about numbers”.

She explained that new entrants with alternate business models, such as “neobanks”, 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,” Ms Waterford said.

“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.”

Another panellist, Tony Richards, the head of payments policy at the Reserve Bank of Australia (RBA), said the delay in the rollout of the New Payments Platform (NPP) “reflects the complexity of some of [the major banks’] systems”.

“To the extent that the challenger banks are all using incredibly new platforms [and] can be much more agile, you can see more competition than just at the edges,” he added.

Mr King, on the other hand, pointed out that a lot of the success of fintechs in countries like China and Kenya is due to such markets being “underbanked” or overly regulated.

“[If you] look at what Alipay has done, look at that sort of innovation, that is, in a country with a highly regulated banking system where, quite frankly, people didn’t put their money into banks. There’s a massively underbanked society,” the PC commissioner said.

“In Australia, we’re in a very fortunate situation in that we’re well and truly not underbanked, and particularly in the payments space, we’ve seen the sort of innovation that makes it very hard… to displace current competition.”

Given the widespread adoption of tap-and-go credit and debit cards (PayPass or PayWave cards), Mr King believes it’s going to be hard for challengers, including digital wallet service providers, to displace their biggest competition.

“A reduction in cash is all driven by the traditional credit card; it’s not driven by a new payment instrument,” the PC commissioner said.

It is difficult to know what type of new payment instrument will stick, according to Mr Richards. He said that 20 years ago, there was an expectation that there would be an abundance of stored value facilities, such as “electronic purses that would replace cash and [that people] wouldn’t use bank accounts”, but that prediction didn’t come to fruition.

Ms Waterford said it’s particularly important to create boundaries for new entrants in order to determine which aspiring ADIs are “fair and safe” to introduce to the Australian market and to build customer trust in new types of financial products and services.

She added that while APRA wants to ensure there is a pathway for new types of products and business models to enter the market, the regulator needs to be cautious because a failure in the early stages will increase scepticism towards new entrants and ultimately have a “detrimental impact on competition”.

Ms Waterford noted that 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,” the APRA general manager of licensing added.

“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.”

[Related: Regulators ‘working through’ systemic risks posed by fintechs]