Murray fails to address new entrants, technology

While the interim report acknowledges the potential impact of technology and innovation, it does not analyse in any depth how the regulatory framework should be crafted to cope with different scenarios involving changes in the boundaries of financial services, new business models, new entrants and the advance of technology, according to the Deloitte response.

“As a result, the inquiry may not adequately consider the impact of these disruptions on the financial system, which may result in the regulatory framework being insufficiently robust to address changes in the financial system over the next 10 to 15 years,” it said.

Digital, technology and the threat of new entrants were key themes in JP Morgan’s Australian Mortgage Industry Report, released on April 2 this year.

The report considered the extent to which innovation can disrupt the Australian lending space.

“Innovation can take hold relatively quickly,” JP Morgan’s Scott Manning said. “Wholesale lenders' share of mortgage approvals increased from virtually zero to 15 per cent share in just over 10 years.

“Contrasting to present-day dynamics, we believe technology is creating the environment to potentially bypass the perceived traditional barriers to entry such as vast branch distribution.”

Banks make much of their money through the distribution of their product, rather than the manufacturing of that product, Mr Manning said.

“Our argument is that on the technology side it allows other people to start to penetrate the profitability of particular segments and to effectively erode the distribution margin, just leaving banks with the actual manufacturing process,” he said.

“It’s part of a broader discussion to not necessarily say, ‘you will have a Google bank one day’ but that technology companies will basically insert themselves between the customer and the end product and grab some of that margin.”

The JP Morgan report found that brand value as a proportion of enterprise value is consistently low across all banks.

“The high level of brand value in technology companies is matched by high levels of willingness to engage these firms in banking activities,” it said.

“As such, technology companies may be able to use the power of their brand to potentially penetrate retail banking market share without needing to build a physical presence to engender trust.”

The report found Google and Microsoft score higher than ANZ, NAB and the Westpac group for digital migrants, while CBA is the highest rated major bank across each digital segment.