Banks told to watch out for small competitors

So I was going to write a long blog about SWIFT today, but it makes more sense to post that one tomorrow after seeing this report by Richard Meadows, a journalist for Fairfax Media who publish New Zealand's popular papers The Dominion Post and The Press, as well as the popular news website Stuff.

A global banking expert says New Zealand's big banks risk being cannibalised by upstart technology companies.

Chris Skinner, chairman of Britain's Financial Services Club, was a keynote speaker at the Payments NZ conference in Auckland this week.

Borrowing money outside the traditional banking system was increasingly becoming the norm, rather than the exception, Skinner said.

He described new market entrants such as peer-to-peer lenders as a swarm of "insects", some of which were explicitly trying to destroy the "big gorillas".

While banks were still making record profits, Skinner said they had historically done so in part by ripping off customers.

With outdated back-end systems and high infrastructure and staffing costs, they had no chance of competing on price with the likes of peer-peer services, which directly connect borrowers with depositors.

Skinner said banks needed to overhaul their legacy payment systems and create a digital-first culture, but senior management did not always put it at the top of the agenda.

"They'll designate it to a team, but the team doesn't have the empowerment to go and knock down the barriers internally," he said.

"If you don't understand that and get that right, you're just putting lipstick on a pig."

Nevertheless, he said banks were far from doomed.

"They are very intelligent organisations that see all this happen, and are waiting for when it's right and ripe to change," he said.

Skinner said there was "a good strong movement" towards digital banking in New Zealand, and Kiwis had a positive attitude towards new technologies.

However, he said he had not seen as much innovation coming from New Zealand as the rest of Asia.

Most of the major banks here have made a big push toward developing mobile banking apps and payments, such as ASB's tool for paying Facebook friends, mobile numbers or email.

However, Skinner said it made no sense for banks to employ armies of developers to do their innovation in-house.

Instead, he said banks were increasingly collaborating with leading technology firms.

He pointed to Westpac partnering with the likes of tech giant Samsung and New York-based Moven, which offered unbranded personal finance tools.

If that did not work, banks could always use their considerable cash reserves to buy out or invest in competitors.

"I'm seeing a lot of banks starting to build incubation and venture capital funds to invest in these insects," Skinner said.

"The idea being, if we're going to be cannibalised and attacked ... we'd rather we owned them."

Regulatory delays mean the peer-to-peer and crowd-funding industry here was lagging behind Britain, where it is has doubled in size in the last six months.

However, banking minnow Heartland has moved to take a 10 per cent stake in Harmoney, the first licensed peer-to-peer lender in New Zealand.

Skinner said New Zealand would reach the same tipping point as other countries once people became more familiar with the new players.

"If the customer starts to understand and trust the new names, and sees that they're far more competitive and relevant than the old names, you will start to see the switch," he said.

He said the coding behind virtual currency Bitcoin could also prove to be enormously transformational, potentially even replacing the Swift network for inter-bank payments.

"It could destroy the financial system as it was, and build a new one," Skinner said. "Everything becomes person to person, point to point, machine to machine. Everything transacts with everything."

However, banks and governments were still likely to be involved, adding trust and credibility.

"You need governance, and the best way to have it is licences," Skinner said.

Yesterday, Reserve Bank deputy governor Grant Spencer told the conference the central bank did not feel threatened by Bitcoin, which "seems to behave more like a commodity than a currency".

However, he said the central bank was concerned about new players entering the payments market, including telcos and the likes of Apple, Google and Paypal.

Spencer proposed tightening up regulation around systemically-important companies that could pose a threat to the broader financial system if compromised or damaged.

- Stuff