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Digitised, decentralised, disrupted

04 April 2023

This article is an excerpt from our latest report The banking industry: A look ahead

Computerisation has worked largely in the mainstream banks’ favour so far, enabling them to reduce their overheads by dismantling much of their physical customer infrastructure while maintaining market share.

But there are a number of initiatives in development which have the potential to transform the sector within the next 10 years, creating a more diverse, difficult and competitive trading environment.

Multiservice fintech providers Ant Group and Tencent have been able to create huge market scale in China within relatively short timeframes. China was more open to new entrants than New Zealand will be because much of the population was outside the formal banking system. But there will be demand here also for flexible, innovative financial products.

Central Bank Digital Currency (CBDC)

The RBNZ is putting a lot of resource into developing a local CBDC for wholesale and retail use, although New Zealand is late to the party as over 60 countries have either launched CBDCs or are in an advanced stage of development with over 20, including Japan, Brazil and Russia, running real world pilots.

A CBDC could create an existential challenge to traditional banking depending on the design – in particular whether there are no, or very high, caps on the amounts that can be held in CBDCs.

Among the possible effects are:

  • Greater competition for bank deposits, requiring banks to pay higher rates on deposit or to offer other inducements (such as ESG mandates) and, to the extent their deposit base is reduced, a restricted ability to lend; and
  • An increased risk of bank runs as depositors may be able to shift their funds to a government backed CBDC at the first sign of trouble, instantly and without any personal cost.
    The extreme speed of the SVB bank run (US$42 billion withdrawn in 24 hours) has been attributed to online banking and social network information sharing, both now rather dated technologies. Customers still needed to have an alternative bank account or fund into which to transfer their deposits.
    An ability to shift seamlessly into a CBDC would eliminate that remaining friction (particularly when combined with open banking, as discussed below).


Private crypto currencies

The use of crypto assets in New Zealand is comparatively low (particularly relative to emerging markets with low financial inclusion, but also to some larger, significant financial centres, including Australia).

This has allowed the RBNZ to be agnostic on crypto to date, taking a ‘wait and see’ approach to permit innovation. They have proposed a focus on monitoring and targeting of systemic areas only.

The regulatory path New Zealand eventually walks will likely be determined by whether the providers are able to demonstrate a clear consumer benefit or become mired in the ‘crypto winters’, scams, crashes and 51% attacks that have occurred elsewhere.

Internationally, banks are embracing cryptocurrencies – whether as tokenised deposits (such as JP Morgan’s JPM Coin) or private stablecoins (such as the USDF in development). These projects provide the customer with greater control and speed of settlement. Because they are privately run, they can also encourage customers to keep their money with, or move their money to, the provider bank to take advantage of the product.

Closer to home, National Australia Bank (NAB) has created the AUDN stablecoin (backed one-for-one with the Australian dollar) and last month became the first mainstream financial institution to use stablecoins to complete an intra-bank cross-border transaction on a public blockchain.

Real-time payments technologies

Payments NZ, the industry-owned body established with RBNZ support in 2010 to manage New Zealand’s core payment systems, has suggested 2030 or later for creation of a real-time settlement system.

New Zealand is again playing catch-up, Australia got there in 2018, but with such a long project timeline existential questions remain. Will it be able to deliver promised benefits, or will regulatory concerns such as fraud prevention reintroduce delays? The UK House of Lords, for example, released a report in November 2022 recommending a new corporate criminal offence of “failure to prevent fraud” which (among other things) calls for the introduction of a delay on real-time payments, potentially lasting several hours, to try to stop fraudsters cashing out stolen funds.

A more immediate goal in New Zealand is the launch of SBI365 in May this year. This does not promise 24/7 or real-time settlement, but will require banks to be able to make payments during normal hours over weekends.

Once in effect and reflected in bank terms and conditions, SBI365 should open the door a little wider for fintech products. Wallet providers that allow round-the-clock payments among users are already taking off and the ability to withdraw and pay between wallets on Saturdays and Sundays will go a long way towards a proxy real-time settlement system.


Open banking

The Government committed in November last year to establishing open banking protocols in New Zealand within the next two years. The precursor step is to create a Consumer Data Right, which will require legislation.

A Bill was to have been introduced before the 2023 general elections but Commerce and Consumer Affairs Minister Duncan Webb has acknowledged that this may be “a bit tight” . However, as National supports the initiative, it will likely be progressed next term whatever the election result.

Open banking will encourage further innovation and integration between banks and third parties, but it will also expose the banks to more competition, remove their data advantages, and require them to invest more in data protection mechanisms to address the increased privacy risks.

Defensive manoeuvres

To maintain their position, incumbents are likely to invest in new payment product developments, develop coordinated ways of working with fintechs and encourage a large, contained user-base through other services and incentives.

This article is an excerpt from our report The banking industry: A look ahead. Download the full report at the link below, or read the other articles in the series. 

Read the full report

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