Much of the popular focus on the financial system inquiry launched yesterday by Joe Hockey will be on the major banks and conventional issues of competition, regulation and risk. But within the draft terms of reference lurks another big issue of concern to the sector and regulators.
While most of those draft terms of reference tread well-worn ground, the inquiry’s examination of “the role and impact of new technologies, market innovations and changing consumer preferences and demography” will address a less charted but rapidly emerging challenge to the conventional banking system. This will pose some difficult questions about competition and regulation.
Senior bankers have become increasingly conscious that, while the financial crisis may have burned off most of their international competitors and resulted in even greater concentration within the domestic system, it has also made the Australian system arguably the world’s most profitable. Its visibility has been raised around the globe.
The impact of the financial crisis on most of the internationalised banks’ balance sheets and the subsequent rising tide of regulation might be reversing much of the internationalisation of banking that had been occurring before the crisis. But a prospective new and far more threatening source of competition is surfacing. The Australian system would have to be one of the more appealing places for it to be deployed.
When Australian bank boards trot off to Silicon Valley to get briefings on the latest banking technologies, their focus is more on the threats they present, rather than the opportunities.
Pre-crisis, one suspects very few bankers spent much time worrying about the competitive threat that a Google, or Amazon, or Apple, Facebook or PayPal might pose.
All the big digital businesses and smartphone companies are playing around the edges of the financial services sector, looking at concepts like digital wallets, payment systems technologies and peer-to-peer lending platforms.
The explosive take-up of smartphones and tablets and the increasing mobility of communications and transactions that they have facilitated have enabled big technology companies to amass massive global customer bases. They have built global brands around connected communities of users, underpinned by vast and sophisticated digital platforms.
They already have highly sophisticated payment systems connected to the traditional bank and credit card payments systems, where the middleman could easily be removed. They have also massive hoards of cash that, because of US tax laws, can’t easily be repatriated or disbursed to shareholders.
When those companies begin a serious shift into financial services and begin disintermediating traditional banking transactions, they will pose a serious competitive challenge to the banks, credit card companies and regulators.
Australian banks are preparing themselves for the onslaught by investing heavily in technology platforms and introducing real-time capabilities to match the types of offerings they believe new competitors will focus on.
Local and international legislators and regulators have tightened their grip on the traditional banking system post-crisis and have rolled out a much tougher regulatory regime, with significantly greater capital and liquidity requirements. In most jurisdictions where deposits are guaranteed, they have some form of premia for the guarantees.
How new technology-based non-banks offering banking services are regulated will have a significant impact on their competitiveness and the extent to which the system itself is affected.
Digital challengers have wreaked havoc on other sectors. The media and the music industries are classic examples. The banking system is, however, at the core of the financial system and ultimately the economy. No regulator or legislator would want to see it destabilised.
As former chief executive of Commonwealth Bank, David Murray might be a somewhat controversial choice to head the inquiry. But with his intimate understanding of the sector and its technological strengths and vulnerabilities, and his sheer (and somewhat iconoclastic) intellect, he would be far more aware than most non-bankers of the potential for new sources of competition to disrupt and destabilise the system.
There are plenty of worthy streams of inquiry within the terms of reference. The capacity to fund growth and allocate capital efficiently; to generate greater competitive intensity; to improve the effectiveness and reduce the costs of regulation; to increase the efficiency of the system and to ensure its stability are all important areas for inquiry.
In the longer term, the potential for structural change means legislators, regulators and incumbent institutions must be prepared for a host of novel issues. The attractiveness of the Australian system to ‘cherry-pickers’ may mean there is not much lead time. The inquiry should provide a forum for brainstorming some of those issues.