Productivity Commission’s banking review:
The way forward

Productivity Commission’s banking review: The way forward

Posted by Xinja CEO Eric Wilson. Originally published on LinkedIn.

It’s been quite a week for a banking nerd like me. The Productivity Commission released an absolutely devastating draft review of competition in banking, which combined with the upcoming Royal Commission looks almost certain to herald more changes to the banking industry. It’s been a pretty stormy week!

Let’s look to the future of banking

This article isn’t going to bank bash though, there are enough people dumping on the legacy banks right now. Whilst I get people are justifiably angry and disappointed, it’s important to remember in these banks there are good people and bad people, and it’s often the good people who are the easiest targets as they are upfront trying to fix things.

Let’s look to the future and take the opportunity to reshape what banking looks like

Hopefully the vast majority of banking professionals and members of the public would accept that things have to change. So assuming that’s no longer an argument let’s look to the future with a bit of excitement and take the opportunity to reshape what banking looks like over the next 10 years. Let’s reshape it so it serves customers and Australians better.

Letting competition into the banking market

For those of you that have a life and haven’t read the really rather good Productivity Commission report, the core tenant of it is that in order to drive change and improvement it is essential to let genuine competition into the banking market.

It of course acknowledges the opposing pressures of stability and competition, but concludes that better consumer data, transparency and genuine competition is urgently needed.

Big Banks that want to pass on a tax increase to consumers?….oops can’t do that if there are 5 neobanks nipping at your heels.

Pressure from neobanks can help drive change

Obviously as the CEO of a pro-open data, pro-transparency, pro-competition neobank that makes perfect sense to me, but it should also make sense to anyone else who doesn’t normally give a fig about banks and banking.

Big Banks that wants to pass on a tax increase to consumers?….oops can’t do that if there are 5 neobanks nipping at your heels.

Want to not pass on interest rate changes in full?….might be awkward if there are a bunch of neobanks happy to do so.

Not interested in cutting your costs and passing those savings onto consumers?…tricky situation if there are technically advanced neobanks doing just that.

Even the most stubbornly blinkered individual has to see that this is good for Australians and Australia. Hell, in the long term it might even be good for the current oligopoly banks, forcing them to become lean, efficient and globally competitive.

A ‘smokescreen’ is created by incumbents using many different brands to give the illusion of choice

Beware brands masquerading as neobanks

Of course it’s never as easy as saying “lets have more competition”, and the report talks a great deal about how a “smokescreen” is created by incumbents using many different brands to give the illusion of choice, when in fact the products all come from the same place.

This really worries me, and I think it has a real chance to derail the neobank movement’s ability to bring competition by confusing the market.

We are already seeing brands claiming to be brilliant new banks, or banking solutions in Australia. They present what looks like a pretty cool, technology savvy, digital front end. It’s not until you dig through several pages of disclosure documentation, which lets face it, no normal human being does, that you realise its a “joint venture” with an existing major bank.

Personally I think that’s a bit rubbish and just further entrenches the existing players. It appears the Productivity Commission thinks so to.

Giving advisors a fiduciary obligation to act in the best interest of their clients doesn’t seem unreasonable

Mortgage advice needs to be in customers’ interests

Finally another enemy of competition is the perennial thorny issue of commissions corrupting a mortgage brokers ability to give genuine advice in the best interest of the customer.

We went through this with financial advisors a few years ago, and the Gillard government brought in the ‘Future of Financial Advice’ legislation as a result. Financial advisors had commissions banned and were given a legal obligation to act in the best interests of their clients.

The Productivity Commission is of the opinion that the advice mortgage brokers give their clients is too heavily influenced by which bank, or non-bank lender, will give them the most commission. If true, that’s bad news for the nearly 50% of borrowers that go through a broker.

Perhaps its time for an equivalent of FoFA for the mortgage advice industry. Giving advisors a fiduciary obligation to act in the best interest of their clients doesn’t seem unreasonable.

That said, mortgage brokers have a right to earn a living the same as anyone else and care would need to be taken around designing a new, provider neutral, economic model to ensure that brokers were still able to earn a living and that the valuable service they provide continues to be widely available. Having less people seeking high quality mortgage brokerage advice would be a terrible outcome.

With a bit of luck this Productivity Commission report and the upcoming Royal Commission whilst all a bit dark and depressing, might mark the beginning of the end of the oligopoly banking system in Australia.

The start of a bright new age of banking in Australia, might have been delayed compared to overseas, but remember, it’s always darkest just before the dawn.

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