A new PricewaterhouseCoopers Report suggests that by 2030 New Zealand could exist without banks of the traditional kind.
The Report, ‘The Future Shape of Banking,’ says that as barriers to entry for non-banks to provide formerly ‘core’ banking services continues to decline the business models of today’s banks will be challenged.
New Zealand’s banks remain profitable, but the industry needs to consider how long this strong performance can continue with technology, customers and regulation changing everything.
With non-banks beginning to snap at the services offered by traditional providers, such as equity crowd funding and peer-to-peer lending, the banks’ priority must be staying on top of this changing financial market.
The banking industry of the future will look very different from today.
New Zealand’s banks must play to their strengths and push ahead with transforming for the future or risk losing their incumbent advantage.
Yet, the Report points to the substantial advantages that traditional banks enjoy in helping to prevent their positions being challenged. The brands and reputations of banks remain powerful, shored up by familiarity, experience and regulation.
Trust matters in financial transactions and some of the resistance to alternative banking providers results from a lack of trust in their security. Brands and reputation will become central to banks’ value.
The big changer noted on the horizon is the speed of technology change, which can alter the cost structure of whole industries, to the point where what was once a barrier to new entrants becomes a handicap for incumbents.
Traditionally the cost of banks’ technology infrastructure and bespoke systems acted as a defence to new market entrants.
Yet, with the rise of mobile banking and online platforms and people’s willingness to do their banking online, banks’ legacy infrastructure and systems could soon be a hindrance.
Technology is also making it easier for customers to switch between banks and other service providers.
Banks must commit to radical change, invest heavily in customer service and operational innovation and stay ahead of the curve in terms of technology, changing customer expectations, culture and regulatory change.
But this need to transform comes at a time when the task of dealing with legacy issues and regulation is consuming huge amounts of resources, such as New Zealand’s new Anti-Money Laundering regime and restrictions on high loan-to-value mortgages.
Ironically, the Report suggests New Zealand’s banking industry could be vulnerable to challenges from Europe’s banking industry because it suffered more severely during the global financial crisis.
The European Scene
Europe’s banks faced close scrutiny, and a raft of regulatory reform well beyond what we’ve seen in Australasia following the financial crisis, with some institutions brought to their knees. Those that survived have emerged stronger, more innovative and agile than their counterparts around the world.
Ongoing stress tests and a far more challenging market than New Zealand positions Europe’s banks well and pose a threat to New Zealand’s industry.
New Zealand’s approach to regulation will also need to change with the industry.
Banking regulators focus on a smaller number of ‘too big to fail’ institutions that dominate the financial market.
In the future, banking services will be more dispersed and the challenge for regulators will be to increase their remit to include areas that currently fall outside it or are only touched on at the moment.
Who will pay the cost of regulation, which will include monitoring many more providers? Currently it is the big financial institutions.
Bruce Baillie is Financial Services Leader at PricewaterhouseCoopers New Zealand based in Auckland.