On 15 July the government’s financial system inquiry, which is headed by former Commonwealth Bank boss David Murray, published its interim report. In the run up to the release, there was a hype of voices foreseeing start-ups and new global entrants disrupting the Australian banking oligopoly. As if “Tech start-ups threaten dominance of big banks: Murray” titled by the Australian Financial Review1.

Innovation and competitive tension is dearly needed in the Australian banking space, but the reality is discouraging. While hundreds of hopeful start-ups innovate at the periphery mostly providing consumers a better user experience on flashy mobile devices, the four major retail banks and two global schemes have solidified their dominance in recent years.

The barriers to entry and to scaling up are persisting and remain enormous2. Where are the real success stories in banking and in payments? Only PayPal conquering the at the time new and long ignored online payment space became a significant new player. Whether it is the powerhouse Google with its wallet, the hyped start-up Square with mobile solutions and many others, they all have not shown any sustained success.

The challenge of disrupting the highly concentrated banking space is daunting. The big banks sit on the money that Australians keep on deposit. They are ferocious competitors in terms of protecting that position. To really take on the banks, the challenger has to consider what it takes to build a meaningful position in a highly regulatory environment, gain access to powerful recalcitrant banks to clear and settle into deposit accounts, unbundle the existing bank relationships, gain sufficient scale and resolve network effects.

When Tyro Payments started in 2003, three extremely talented and naive engineers felt they could take on the banking establishment. The Reserve Bank of Australia had invited new entrants. They were the only ones that came.

Tyro became the one and only independent EFTPOS provider in Australia. It just closed the 12th year of that effort processing $5.3 billion in credit and debit card transactions for 10,000 small-to-medium businesses; that is out of $480 billion that Australians spent in card payments. It proves that one can compete successfully with the bank oligopoly, but it is hardly disruptive.TEST

There is a big difference between competing for core processes in the heartland of banking or for new user experiences on cool mobile devices. The former faces the anti-competitive structures and culture of the banking industry, the latter build new worlds outside of the banking system. To a large extent the latter are in the long run at the mercy of the banks, who buy them for their technology like Bank Simple was bought by Banco Bilbao Vizcaya Argentaria or CyberSource by Visa.

It is interesting to see Paul Bassat, the co-founder of SEEK or Mike Cannon-Brookes, the co-founder of Atlassian, foreshadow start-ups about to disrupt the banking business. Their optimism is fed by their own tremendous success stories. However, banking is a very different world. These entrepreneurs saw an opportunity and conquered new land. Bank challengers need to move into the banking space that is well defended by dominant entrenched incumbents.

Tyro has taken up that daunting challenge. We continue to encourage an engaged regulator, a strong competition authority and finally also our entrepreneur colleagues. We here at Tyro know the school of hard knock. Yes, the banking industry should be ripe for disruption, but it certainly is a marathon.

1 http://www.afr.com/p/business/companies/tech_start_ups_threaten_dominance_wfxgVMtrmnTgWEVpxS7F8J
2 http://fsi.gov.au/files/2014/04/Tyro_Payments_Ltd.pdf