Productivity Commission calls for increased banking competition in Australia
(7 February 2018 – Australia) In its draft report, called Competition in the Australian Financial System, the Productivity Commission has said that increased competition in the Australian financial system has largely been driven by new entrants and foreign banks.
"But this revolution is over," they wrote.
"All new entrants to the banking system over the past decade have been foreign bank branches, usually targeting important but niche markets."
The commission added that should barriers to entry and expansion continue to fall, and data reforms are pursued effectively by the Federal government, non-bank firms, startups and fintechs will find it easier to compete against incumbents.
"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.
The commission has made a recommended for a "champion”, a government agency responsible for overseeing and promoting competition in financial markets, including forcing consideration of whether actions by regulators materially harm competition. Instead of a new entity, the commission wants this designated competition champion to be either be part of the Australian Competition and Consumer Commission (ACCC) or the Australian Securities and Investments Commission (ASIC).
"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 draft report highlights.
"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 highlighted that most of the investment in fintech has been directed towards the payments industry, however, card payment systems continue to be dominated by the major banks and payment service providers MasterCard and Visa.
"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."
Further, the Commission cited concerns around the New Payments Platform (NPP). It said that although the infrastructure allowed an easier connection to the payments network for new entrants, final acceptance to the network would be up to the New Payments Platform Australia Limited board -- 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 expected to produce its final report by 1 July 2018.