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Brief Counsel

The Reserve Bank's view on digital disruption in the banking sector

27 June 2016

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​In Disruption or Distraction? How Digitisation is changing New Zealand banks and core banking systems, the Reserve Bank plots how new technologies are disrupting traditional methods of making payments and borrowing money. 

Banks are responding to the challenge with their own innovative products and services.

But what is missing is a clear strategy from the Government to promote New Zealand as a financial technology (FinTech) centre. Globally, this is a highly competitive area and, unless New Zealand moves now, we may find ourselves vulnerable to innovation from offshore.

Disruptors

Consumers now expect the same seamless digital services from banks as they receive from other industries.  The banking industry is responding but is also being ‘digitally disrupted’ as banks and technology firms race to meet this expectation.

The key disruptions identified by the Reserve Bank in the banking sector are in:

  • payment services – where electronic wallets (PayPal, Apple Pay, Google Wallet, PushPay or Semble) or digital currencies (Bitcoin) are separating banks from their customer’s payment data and may erode their traditional customer relationships, and reduce their ability to cross-sell and cater products to customer needs, and
  • lending and financing – where crowd-funding and peer-to-peer lending providers (such as Harmoney in New Zealand and RateSetter in Australia) take the more valuable direct customer relationship with borrowers and lenders and cut into the banks’ intermediary profits via their own interest or fee charges. 

The Reserve Bank notes that there is potential for these disruptors to move into developing technologies that could replace traditional bank back-end settlement systems.  However, this has yet to occur and would likely be subject to prudential regulation.

Impact on banking

The primary impacts on banks from digital disruption are in front-end payment services, the banks’ ability to see customer data, and the loss of profitability in retail payments or through charges on lending. 

In the short to medium term, the Reserve Bank says that disruptors have little interest in providing banking services which are captured by prudential regulation, which constrains their flexibility and capacity for innovation and development.

In the long term, the Reserve Bank thinks that banks’ role in the financial system may be challenged.  Disruptors may become systemically important if they supply a large portion of front-end banking services.

In the meantime, the Reserve Bank intends to ‘wait and see’ whether the products offered by payment or lending disruptors should be subject to prudential regulation.

The banks’ response

The banks are pursuing a range of strategies to counter the threat in:

  • mobile – by increasing their Mobile Banking capabilities to allow for mobile banking apps and access to banking services online
  • branches vs help centres – by remodelling physical branches to allow for a more customer focused environment as well as improving social media presence and ‘virtual helpdesk’ assistance
  • partnerships – by partnering with third party providers to allow retention of customer data or the introduction of new technology, and
  • upgrading core banking systems – so that online customer interfaces allow for seamless digital banking, and to ensure they actively respond to digital disruptors.

The Reserve Bank thinks these developments may pose operational risks for the payments system and for lending and borrowing decision making; but they also have the potential to improve the overall efficiency and soundness of the financial system.

Chapman Tripp comment

In our view, there is a need for the Government to work with the sector to establish a strategy to make New Zealand a global financial technology centre.

Other countries are being highly proactive in producing integrated policy and regulatory strategies to promote their financial technology sectors.  In March 2016 alone:

New Zealand also needs to develop a strategy, and quickly, or it risks being vulnerable to innovation from offshore, in what is a fast-growing and highly disruptive sector.

Our thanks to Brendon Orr for writing this Brief Counsel. For further information please contact the lawyers featured.

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