It’s good to see the increasing groundswell of debate around Australia’s readiness for the digital century, but I am very worried. Australia is at a crossroads.
Australia’s dominant banks fare well. They navigated through the global financial crisis, strengthened their position as an oligopoly and continue to declare record profits. CBA announced an 8% increase to a record cash profit of $4.62 billion.
The big banks talk about their drive to innovate a lot . They spend billions in new front-end experiences, offering the new generation of digital consumers multi-channel access, mobility and flashy ways of engagement. In a recent survey by next-gen banking vendor Five Degrees however, 65% of 96 financial organisations felt that their existing core system could no longer support its needs. The banks will be busy overhauling their outdated core legacy system over many years.
There are now a few emerging new entrants and innovators in the Australian financial services and banking space and there is some hype in the community around banking being ripe for disruption.
There is no doubt that Australia is blessed with talent and increasingly the best and brightest are considering investing their creativity and agility into starting new businesses, challenging the way banking is done, but they face dramatic barriers.
We can continue to pay lip services to innovation and competition, protecting the core banking system and dividend yields or we can take action, change course and open up banking to competition. We have fallen hopelessly behind on the global stage. The success stories are written elsewhere. We need to think about our options:
- The major banks could nurture Australian startups to strive and scale up quickly, enabling them to compete with disruptive new ideas that will ultimately let the big banks compete on the global stage.
Counterintuitive, but true. Big institutions are good at big scale marketing and distribution, not at trying daring new ideas and accepting failures, the critical ingredients for disruptive innovation.
The reality is that regrettably the major banks decided against that approach. Instead of offering open APIs to the startup community that enable real-time access to the banking system, they reluctantly implemented a drawn out effort in the form of a new shared payment infrastructure; ultimately only delivered under pressure from the Reserve Bank of Australia. Old world thinking.
- The major regulators could encourage and support Australian startups by offering a graduated regulatory regime that is commensurate with the risk that new business models and players inject into the banking space.
Counterintuitive, but true. If the new players cannot compete under the regulatory umbrella, they will move into the shadow space, where the risks are that much more intransparent and literally out of their control.
The reality is that in Australia there is the strictly regulated world of the full bank – taking deposits and advancing money – or the unregulated space that is barred from banking access. In the absence of a level playing field regulation, effect test and punitive or treble penalties, big banks can stifle competition.
We need to urgently change tack. There are so many potential new entrepreneurs, startups, incubators, accelerators that merit a fair Go. Now is the time to do anything and everything to allow them to succeed. We are late in the global race. Would it not be great, if we also had some great success stories in banking? In other industries we have seen some of these coming from Down-Under.