by Rebecca Merrett

Regulation stifling financial tech innovation

Apr 09, 20146 mins
InnovationIT Management

The Australian government needs to take a more balanced approach to regulation and stop stifling banks’ ability to innovate, several financial institutions have urged in their submissions to the Financial System Inquiry.

The inquiry received about 219 submissions by the end of March 2014.

Banks said they have found it difficult to keep abreast of rules around the electronic delivery of disclosure information.

“Until very recently, insurers in Australia were prohibited from delivering disclosure information –such as a product disclosure statements and policy wordings – electronically,” QBE said in its submission, adding that this contributed to significant mailing costs for insurers.

“This really demonstrates that in some cases, we are decades behind the times. More significantly, it also creates the impression for consumers and customers that the insurance industry is lagging badly behind in terms of the speed of society when in fact, it is impeded by restrictive and outdated regulation.”

Suncorp Bank, along with a few others, agreed, pointing out that paper-based and face-to-face methods of delivering disclosure information “creates a very real barrier for responding to consumer preferences”.

“Increasingly, customers demand the ability to bank wherever they are, however they want and in a timely manner. The majority of customers are eager to adopt new approaches that make their banking more convenient and faster,” Suncorp said.

“A move to balance electronic forms of communication with paper across the various pieces of regulation offers many benefits, including a more measurable and interactive engagement with disclosures, faster and more convenient services, and the possibility of an easier process for multiple services.”

Many banks also showed support for a principles-based approach to cloud computing over prescribed guidelines that are seen to restrict the uptake of the technology.

“Regulatory guidelines should encourage, and not limit, the industry advancement around the use of new technologies such as cloud or third party computing services via a clear set of industry principles,” said National Australia Bank.

Westpac suggested banks and regulators need to take a collaborative approach when it comes to the take up of new technology rather than using prescriptive measures.

“The impacts of technology are typically not ‘black and white,’” Westpac said. “Supervisory agreement to ‘pilots’ of new technologies – that would test their functionality and resilience with a small sample of customers – is an example of this collaborative approach that Westpac supports and which has been effective to date.”

Timeliness of payments

Since the release of its lt;igt;Strategic Review of Innovation in the Payments Systemlt;/igt;, the Reserve Bank of Australia (RBA) has been working with industry on developing a New Payments Platform (NPP) that enables consumers and businesses to make real-time payments around-the-clock.

Read: Banks slow with payment tech innovation: mHITs CEO

“Total card transactions [grew] to around $480 billion in 2013,” the RBA said in its submission. “Direct entry payments are a key part of the Australian payments landscape.

“A DE payment is an instruction from a bank account holder to their bank to pay (or collect) an amount directly to (from) another bank account. These payments continue to account for the bulk of the value of non-cash retail payments (87 per cent in 2013).”

One of the objectives of the strategic review is to enable same-day settlement for all DE payments, which was achieved in November 2013.

Other objectives include the ability to make real-time retail payments, to make and receive low-value payments outside normal banking hours, and to send more complete remittance information with payments. These are expected to be achieved by the end of 2016.

“The bank [RBA] and Australian Payment Clearing Association have been consulting on the structure and scope of a new industry coordination body, to be known as the Australian Payments Council.

“Accordingly, in conjunction with the establishment of the Payments Council, the [RBA] will also launch a new User Consultation Group,” the RBA said.

“This will provide a more structured mechanism for users of the payments system to express views on payments system issues as an input to the bank’s [RBA’s] policy formulation process,” it said.

“The RBA expects that both the Australian Payments Council and User Consultation Group will begin to meet this year and looks forward to working with both bodies.”

RBA said the NPP will be based on a hub infrastructure, which will be “more efficient and access-friendly than the existing bilateral payments architecture”.

“The hub will link ADIs [authorised deposit-taking institutions] and other approved entities and be capable of supporting the exchange of fast flexible payments messaging.

“It will be linked to a settlements service built by the bank [RBA] to provide real-time interbank settlement of each NPP payment. Both will be available on a 24/7 basis.

“This basic infrastructure will be accessible by commercial ‘overlay’ services that can be tailored to particular payment needs of customers,” the RBA said.


Commonwealth Bank of Australia said in its submission that non-traditional banking organisations can offer services without having the same kind of regulations imposed onto them as banks, creating an uneven playing field.

“Australian customers must be offered the same protection and security by new players that they receive from traditional banks,” CBA said.

“This is especially critical as many businesses increasingly use advanced data analytics on large data sets (‘big data’) to deliver more tailored services and products.

“The use of big data to provide insight into a customer’s preferences must be carefully balanced with a customer’s right to privacy and existing obligations businesses face in the handling and treatment of such data.”

The bank said this lack of regulatory consistency increases the risk to customers and to the stability of the financial system.

Another issue CBA identified was customers often having multiple online identities, increasing the risk of fraud.

“These burdens can inhibit the digital economy from fulfilling its potential – as much as two-thirds of value generation is at risk if there is not a trusted flow of data.

“Offering individuals the opportunity to use a trusted digital identity to access a range of online services will enhance their online experience and improve trust, security, privacy and productivity,” CBA said in its submission.

Macquarie Group suggested regulation should accommodate the FIDO (Fast Identity Online) Alliance that is developing specifications that define open, scalable, interoperable security mechanisms for online user authentication.

CBA also pointed out that Australia’s national cyber security strategy has not been updated since 2009.

The bank recommended the strategy be updated, and the government promote greater public-private partnering on real-time sharing of information and intelligence, formalise roles, responsibilities and protocols in the event of a cyber-crisis.

It also wants the government to explore incentives for private sector investment in cyber security, and advocate internationally for Internet policy and governance settings that will enable growth of the digital economy.