Submission to the Productivity Commission Inquiry into Competition in the Financial System 7. Summary of Key Themes

The discussion in the preceding chapters highlights that periods of more intense competition in individual markets have typically come from new models and new entrants rather than existing players, for example:

• The growth of the RMBS market and entry of mortgage originators led to strong competition in mortgage markets in the mid-to-late 1990s.
• The adoption of online savings accounts – initially by foreign banks – led to greater competition in deposit markets.
• The recent entry of some Asian banks into corporate lending has increased competition in that market.

New entrants, particularly those with new business models or low costs, are therefore likely to be important in determining the future competitive environment. Such entry cannot be easily engineered; the role of authorities is to provide a supportive regulatory and competitive environment, with no unnecessary impediments, while ensuring that the system remains safe, both systemically and for individual customers.

The Commission's Terms of Reference is broad and its enquiries could follow many potential paths. The following provides a brief summary of areas contemplated in this submission that are likely to be of interest to the Commission.

Foreign banks. As noted above, foreign banks have been important in some episodes of more intense competition. However, their participation can be contingent on developments in their home jurisdictions. The small business market could most benefit from foreign entrants at present. Greater access to the credit and payment histories of borrowers might be beneficial to this. There is also scope for foreign entrants to compete more actively in the mortgage market – though the Bank would not wish to see this result in the erosion of lending standards.

Fintech. There is some scope for fintech lenders to add to competition in under-served markets, including by using new techniques for distribution and credit assessment. Fintech developments can also help to increase transparency and reduce impediments to switching providers. The sustainability of these new techniques and players needs to be assessed over a full cycle. We note that considerable effort has been made to accommodate new players through ASIC's ‘regulatory sandbox’ and Innovation Hub, legislation to support crowdsourced funding and APRA's consultation on its authorisation framework. Support is also available through various ‘incubators’. In the Bank's view, these initiatives are striking an appropriate balance. The ability for start-ups to experiment with a concept at relatively low cost and quickly move on if it does not prove successful (‘fast failure’) is important for supporting innovation. In the longer term, however, a firm cannot and should not expect to rely on lighter regulation than its competitors to sustain its business.

Funding costs and implicit guarantees. The lower funding cost of the major banks has constrained the ability of smaller ADIs to compete since the crisis. This differential has, however, narrowed recently, as smaller banks' funding costs have declined more quickly than those of the major banks. Regulatory measures, such as higher capital requirements for the major banks, higher risk-weights on mortgage lending and the bank levy, have contributed to this. The Financial Claims Scheme also minimises retail depositors' concern about the safety of deposits in smaller institutions.

Information problems and transparency. Efforts underway to promote open banking and comprehensive credit reporting in order to reduce information problems could also help improve competition as will greater transparency of lending rates. The latter will be addressed under current data initiatives and proposed legislative changes.

Price differentiation. Banks appear to be able to differentiate freely between old and new customers, suggesting that established customers are not sufficiently aware of the possibility of a better deal or are reluctant to switch providers. This could result in established customers cross-subsidising new customers. Greater transparency, as discussed above, would be beneficial as will improvements in switching through digital identity and the NPP.

Bundling. Product bundling is also an inhibitor to switching and competition, though it can be convenient for customers. Consideration could be given to whether current practices strike an appropriate balance.