Banking Review

Why a lack of competition is holding back Australia’s financial sector

It’s perhaps no surprise that the Government-commissioned report ‘Australia as a Financial Centre’ uses the word innovation just a handful of times.

As the report’s authors admit, it’s strength, stability and a sound regulatory environment that characterise leading financial centres. It’s these attributes that helped Australia overtake the US last year as the world’s second best financial centre, as ranked by the World Economic Forum.

As this diagram highlights, Australia’s major banks have weathered the GFC well, remaining strong and relatively well capitalised.

Source: ‘Australia as a Financial Centre – Building on our Strengths‘, 2010

The problem is: this performance hasn’t translated into greater exports (currently 3% of GDP), and imports of financial services, which remain low in Australia, particularly when compared with the cross-border activity of other developed nations.

Australia’s banking sector is crying out for increased competition, competition that the report’s authors acknowledge could come from international entrants, helping to foster price competition and innovation. Yet despite several foreign banks being registered in Australia, activity has been limited, and more recently Canadian institution Toronto-Dominion, and European bank Credit Suisse have relocated much or all of their regional operations to other Asian countries.

The report makes a number of recommendations related to Australia’s tax regime, and there’s no doubt these will help encourage foreign investment. Some in the industry want this to go further, arguing the best model for Australia is one reliant on tax concessions to lure foreign players.

The reports authors rightly argue such an approach is neither desirable nor sustainable. At present our stable banking market, combined with the removal of red tape, will lead to more foreign entrants. The bigger barrier to date has been the lowered risk appetite and reduced capital of international banks suffering as a result of the GFC.

But what of our ability to export Australian banking services into other markets?

The report argues growth in income and wealth in Asia will require development of a wider range of financial services, an opportunity Australia is geographically poised to take advantage of.

So what exactly does Australia’s financial sector excel at that it could export to its Asian neighbours?

It wouldn’t be our payments infrastructure, the pipes of which are becoming calcified. Even BPAY, once viewed as innovative, is rapidly being leapfrogged by payment start-ups across Asia. In developing world countries such as India, millions of consumers are more likely to be making payments to eachother using their mobile phone by the time Australia builds new payments infrastructure.

Meanwhile the UK’s faster payments system has already enabled payments to be processed in real-time. Australians still face the inconvenience of their funds magically disappearing into the BECS system, a disappearing act that can take days when a weekend is involved.

What about our ability to strategically develop and price financial products? Some would argue it was our industry’s lack of innovation in this space that actually protected us from the worst of the GFC. There has been little personalised pricing in Australia, such as this offering from Turkey’s Garanti Bank, and we’re only now beginning to move towards a positive credit reporting environment, making us one of the last developed economies to do so.

And is Australia’s financial sector a leader in adopting technology and harnessing it to acquire new customers or better serve existing ones? Actually our banks prefer to be early followers, and it’s start-ups like Mint, Strands, SmartyPig and Xero that are currently leading the way.

Let’s face it, Australia’s best financial services industry export is probably its skilled workforce, with our best people constantly moving offshore in seek of better paid, lower taxed and more exciting opportunities.

We may see Australia’s financial regulatory system exported as regulators around the world look to best practice, but that’s not likely to impact our GDP.

Our market must become significantly more competitive if we are to encourage our banks to explore beyond their current Utopia.

The report argues “financial sectors that are open, efficient, competitive and stable are likely to attract offshore business”. Three out of four won’t cut it.