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Productivity Commission still banks on fintechs changing financial services

Although fintechs are a small part of the financial system, a draft report into Competition in the Australian Financial System has said they represent a group that could 'fundamentally' change the nature of competition.

All recent entrants to Australia's banking system over the past decade have been foreign bank branches, usually targeting niche markets, rather than locally based financial technology startups, a report from the federal government Productivity Commission has said.

However, the commission believes fintechs represent a group that could "fundamentally" change the nature of competition in the banking system in Australia and as such is pushing regulatory change to allow for risk-taking, overseen by a "change champion".

In its draft report [PDF] into Competition in the Australian Financial System, the commission said that when periods of heightened competition in the Australian financial system have come about, they have typically been driven not by established providers but by new entrants such as Aussie Home Loans, foreign banks such as ING offering online retail banking, and Rabobank, which offered services to medium-to-large agribusinesses.

"But this revolution is over," the commission wrote. "All new entrants to the banking system over the past decade have been foreign bank branches, usually targeting important but niche markets (and these entrants have evidenced only limited growth in market share)."

The commission said that if barriers to entry and expansion continue to fall, and data reforms are pursued effectively by the Australian government, fintechs will find it easier to compete against incumbents.

The banking scene is largely dominated by four major players, with the Commonwealth Bank of Australia, the National Australia Bank, the Australia and New Zealand Banking Group, and Westpac holding around a 95 percent share of the entire Australian finance industry.

Of concern to the commission is that the large banks are required to think mostly in the best interests of their shareholders, rather than their customers, which it said leads to competitive strategies being devised to purely bring in money.

"Innovation and rivalry in price is limited in most of the markets we examined. There appears to be more evidence of competition in product features," the commission highlighted.

As a result, the commission wants to see a "champion" -- a government agency tasked with overseeing and promoting competition in financial markets, including forcing consideration of whether actions by regulators materially harm competition.

"The commission's assessment is that while unmonitored competition could result in risky ventures -- and Australia does not have unmonitored competition -- desirable growth in employment and national welfare is necessarily fuelled by risk-taking," the report says.

"We cannot therefore simply prefer stability, without acknowledging a significant cost to economic activity from having that as a default position. And there is no detectable evidence of risk to Australia's financial system from integration, even in the GFC.

"Given the size and importance of Australia's financial system, and the increase in stability since the global financial crisis, the lack of an advocate for competition, when financial system regulatory interventions are being determined, is a mistake that should now be corrected."

The commission wants this designated competition champion to be an entity that holds all parties in the financial system to account on competition, rather than a new player.

The commission has put forward the Australian Competition and Consumer Commission (ACCC) or the Australian Securities and Investments Commission (ASIC).

The House of Representatives Standing Committee on Economics similarly recommended in late 2016 that ASIC be charged with developing a binding framework to facilitate bank-to-bank sharing of data, making use of application programming interfaces (APIs), and ensuring that appropriate privacy safeguards are in place to allow such a practice.

According to the Productivity Commission, Australia's uptake of digital payments is an element of the financial system that has attracted much fintech activity, as well as from major tech firms such as Apple and Google.

Card payment systems, however, are dominated by the major banks as the issuers of over 70 percent of Australia's debit and credit cards, as well as the global card schemes, MasterCard and Visa, which enable over 80 percent of credit card payments, the report highlights.

"The technology is readily available to offer dual payment choice in Australia and we consider this must now be mandated," the commission added on that point.

With digital wallets such as Apple Pay and Samsung Pay gradually hitting the market in Australia, the commission wants the establishment of a two-tier regime for purchased payment facilities (PPF) to encourage innovation and offer an alternative to incumbent payments systems.

"Under such a regime, PPFs without systemic risk would be not regulated if a consumer has only minimal funds ($500 or less) at risk and the PPF has less than $50 million in total stored value," the commission wrote. "The present system seems to have this thought in mind, but in practice there is an unnecessary grey area."

See also: Australian banking cartel loses fight against Apple

As Australia moves to a new banking platform -- apparently this month -- it is expected to allow smaller banking players access to innovating on top of the technology built by the Reserve Bank of Australia.

The commission is concerned that although the basic infrastructure of the NPP gives new entrants the ability to join the network using one single connection, rather than establishing bilateral links with all of the existing participants, and that institutions can also choose to join the network by using an outsourcing arrangement to a shareholder participant who is already connected, it is, however, up to the board of the New Payments Platform Australia Limited -- which includes seven large banks -- to determine whether or not to accept an applicant.

"The NPP is a significant piece of national infrastructure and more transparency and rigour around the process for access is needed to avoid conflicts of interest that would potentially restrict competition," the commission added.

The commission is accepting submissions on its draft report until March 20, 2018, and is expected to produce its final report by July 1, 2018.

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