The fortnight that changed Australian fintech forever

It was always on the cards that the first two weeks of February 2018 were going to be an important time for the Australian fintech industry.

With the Australian Parliament returning from its summer hiatus, and a number of important reports expected to be released, there was a feeling that some fintech-friendly announcements were coming our way.

However, no-one really could have predicted just how big the fortnight turned out to be.

If anything, it was the week when the tectonic plates in Australia’s financial services industry finally began to move…away from the incumbents and towards the challengers.

Release of Productivity Commission report on financial system competition

The first big announcement off the rack, on 7 February, was the release of the Productivity Commission report into competition in Australia’s banking and financial services system.

The Productivity Commission is the Australian Government’s independent and fearless terrier which sticks its nose into stuffy old areas of regulation and policy to find ways to make them well…more productive. The government, in July 2017, gave the Commission precisely this task when it came to the Australian financial system. And, in response, the Commission decided to take a big bite out of the industry and its regulators.

In essence, the Commission found that Australia’s financial regulation had been, since the global financial crisis, simply too focussed on stability, with no one regulator being a champion for competition.

The result of this, it found, were clear.

The number of overall banks in Australia had halved from 1999 to today. These banks were raking in high profit margins from customers. The major banks were an oligopoly. There were a confusing array of different products, but all with high prices. Mortgage brokers who were ostensibly promoting competition were actually just part of the establishment.

What Australia needed, the Commission found, was a permanent (and presumably muzzle-free) financial services competition regulator.

“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 found.

The Commission also found that Australia’s fintech community had the potential to bust up Australia’s cosy financial services club, but needed some help.

“Although a very small part of the financial system, fintechs represent a group that could fundamentally change the nature of competition in the banking system,” the report said.

“While the overall trend towards collaboration between fintechs and incumbents may improve efficiency of operations and reduce transaction costs for both fintechs and incumbents, it also reduces the potential for these new entrants to be a source of competition. 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.”

On fintech-specific issues, the Commission explicitly supported many of the government measures to boost competition, such as open banking reforms and moves to reduce barriers to entry for new challenger banks. But it wanted more.

For instance, the Commission said that Australia’s $1 billion new set of real-time payment rails – the New Payments Platform (NPP) – was potentially anti-competitive and needed an overhaul. The NPP, which launched last week, has been funded by 12 incumbent financial services players, including the four big banks. Currently, fintechs need to cut a deal with these incumbents to use the technology.

The Commission called on the Reserve Bank of Australia (whose legislated objectives included promoting competition in payments) to establish a formal access regime into the NPP, including reviewing the fees and charges set by the incumbents.

“The NPP is a significant piece of national infrastructure and more transparency and regulation around the process for access is needed to avoid conflicts of interest unduly restricting competition,” the Commission said.

The Commission’s report is on exhibition until 20 March.

Release of open banking report

Just two days after the Commission’s weighty 640-page tome landed, the Australian Government released its open banking review. This report was another game-changer.

The review suggests that the government should first make amendments to the Competition and Consumer Act 2010 to require banks to allow customers to access their own data. It suggests the government should then write to the four major banks and give them 12 months to set up application programming interfaces (APIs) to fulfill customer requests.

The release of the review report was welcomed by FinTech Australia, which stated that an open banking regime was “vital to supporting greater fintech innovation – which creates increased competition, greater choice, more efficient delivery and lower price of financial services for consumers.”

An open banking framework was one of the initial policy reform proposals of FinTech Australia, so it is exciting to see our advocacy come to fruition.

A number of FinTech Australia’s proposed policy measures were included in the review, including the need to accredit fintechs and others who receive data and also to run an education campaign for consumers.  We are working with our members on a detailed response.

According to Australian Treasurer Scott Morrison “granting third-party access to a customer’s data will allow rival providers to offer competitive deals, products that are tailored to individual needs, and enhanced services that simplify the choices customers face when accessing banking services.”

“It should simplify the process of switching between banks and help to overcome the ‘hassle factor’ that sees customers stay with their current bank even in the presence of more competitive deals elsewhere.”

Although it wasn’t explicitly stated in the report, there was media speculation that Australia’s open banking regime would begin in mid-2019.

Incredibly, the Productivity Commission and open banking reviews were not the only fintech announcements during the fortnight.

Fintech sandbox regulation

On 8 February, a bill was introduced into the Australian House of Representatives proposing to give the Australian Securities and Investments Commission additional flexibility when it comes to setting the conditions, eligibility and licensing exemptions for its fintech regulatory sandbox.

According to the bill’s explanatory memorandum, the bill will “let the regulatory sandbox evolve with the market to ensure that it stays fit for purpose, allowing for the innovation and growth of the FinTech sector over time, while providing consumer protections for investors. This flexible approach sets Australia’s regulatory sandbox apart from its international equivalents.”

All ADIs now allowed to call themselves banks

Meanwhile, on 15 February, legislation which will allow all authorised deposit-taking institutions (ADIs) the right to call themselves “banks” passed the Australian Parliament.

As explained by Treasurer Scott Morrison when he introduced this bill in October 2017: “By lifting the prohibition on the use of the word ‘bank’, this bill will allow the advantages associated with the term ‘bank’ to flow to all banking businesses with an ADI licence, especially new fintech entrants.

It breaks the vicious cycle for new entrants, where currently they need $50 million to describe themselves as a bank, but must describe themselves as a bank in order to grow.”

The bill passed the Senate without amendments and with the support of the ALP.

Crowdfunding legislation

The downbeat note in this upbeat fortnight was the slow-moving legislation to extend equity crowdfunding to private companies.

Despite being introduced in September last year, and apparent support from the ALP and the Greens, this draft bill continues to wait to be debated in the House of Representatives.

During the fortnight, it made glacial progress from priority item 13 to priority item 4 on the government business notice paper. This is despite the fact that Australia has now been waiting a full five years for the introduction of crowdfunding for private companies.

FinTech Australia has called on the government to make the legislation a priority and to reduce the time from Parliamentary approval to commencement.

By the way – we are expecting more big announcements in coming weeks and you may also want to attend a meetup on blockchain innovation at which our CEO Danielle Szetho will be speaking in Perth next week (February 28).

  • Mark Skelsey is the Director of PR and Comms at FinTech Australia