Australian Banks Need Competition, Not Royal Commission

Recent calls for a royal commission into the Australian banking industry have gained traction this month, attracting support from many in the community who have lost faith in the financial system.

There is no question about the validity of claims made about this sector. Many of the stories of greed, self-interest and questionable ethics within the finance industry are downright appalling.

However, a royal commission is not the right way to drive change.

Firstly, a royal commission will be expensive. The direct cost to the government is likely to exceed $50 million, not to mention the amount spent by companies forced to participate which will far outweigh this figure.

Secondly, a royal commission will be largely ineffective. The banking industry is already heavily regulated, overseen by two large and powerful statutory bodies - ASIC and APRA. Of course these regulators are not perfect, but they do contribute to the relatively safe and stable financial system which we all enjoy. Even more regulation (the likely outcome of a royal commission) will not generate significant benefits for consumers. If anything, it will increase costs for the banks, make it more difficult to access even basic financial services, and deter new competitors from entering the market. All of these outcomes leave consumers worse off.

If politicians, customers or consumer rights campaigners genuinely want to improve the finance industry they should focus their efforts elsewhere. The best thing these groups can do is support radically enhanced competition in the sector.

That’s right - banks need more competition, not a royal commission.

The big 4 Australian banks live in a protected world, thanks to the market oligopoly in which they operate. Westpac, ANZ, NAB and CBA collectively control well over 80% of the market. These companies often move in unison to keep themselves comfortable to the detriment of consumers and competitors. Their customer service is poor and they are slow to develop new products and services. This behaviour is perfectly logical – why would a bank spend time and money on making major improvements when they can comfortably enjoy huge profits from doing things the same old way? There is simply not enough incentive to change.

Increased competition will challenge the dominant players in the banking sector. Smaller, innovative businesses bring better products and services to the market in an effort to entice customers away from the existing banks. As customers begin turning to these new companies, existing banks will be forced to improve their offering or risk their own demise.

So how can we increase competition in the financial sector? The great news is that it has already started. A rapidly growing financial technology (“fintech”) sector has emerged in Australia in recent years. Young fintech companies are developing better, faster and cheaper ways to get things done in the finance world. In fact, one such company – Stockspot – has predicted 7 bank “rip-offs” that will no longer exist by 2020. These are the types of real-life consumer benefits that competition can generate.

If we want to make real and lasting change to the finance industry, the Australian fintech sector must be supported. It is the creative minds behind these young companies that will deliver major benefits to consumers. Large banks threatened with more regulation will not.

The Turnbull Government has already committed to backing the fintech sector, as has the NSW Government and City of Sydney in their support of Stone & Chalk – an innovation hub dedicated to this mission. Politicians, customers and consumer rights activists who genuinely want to improve the finance industry need to do the same.

Technology-driven competition has revolutionised many aspects of our lives in recent years – take online shopping, digital photography and social media to name a few. The banking and financial services industry needs to be revolutionised for the better too. With the right mix of government assistance and regulatory oversight, competition in this sector can flourish to leave everyone better off.

All without the cost and political circus of a royal commission.

Jack Stevens is the Founder & CEO of Edstart – a new financing solution for education fees based in Sydney, Australia.

Illustration by Karl Hilzinger