The last decade has seen a significant shake up in the financial sector including the decline in cash transactions, the rise of cryptocurrencies, the explosion in nonbank lending, and the emergence of peer to peer lending. How do we balance the need for standards and regulation with new product innovations? We talk to Dr Iikka Korhonen from the Bank of Finland and Mr Aidan O’Shaughnessy from the Australian Bankers’ Association to find out.

Both guests were speakers at the Sydney Banking and Financial Stability Conference 2017 organised and hosted by the University of Sydney Business School.

The Sydney Banking and Financial Stability Conference 2017

The University of Sydney Business School Finance Discipline

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Sydney Business Insights is a University of Sydney Business School initiative aiming to provide the business community and public, including our students, alumni and partners with a deeper understanding of major issues and trends around the future of business.

Introduction: Massively disruptive technologies, a range of new players, the demise of traditional operators and the coming of the products we can't even begin to imagine. Welcome to the discussion about the future of banking. From the University of Sydney Business School this is Sydney Business Insights. The podcast that explores the future of business.

Sandra Peter Introduction: The last decade has seen a significant shake up in the financial sector. Think the decline in cash transactions, the rise of cryptocurrencies, the explosion in nonbank lending, the emergence of peer to peer lending - how do we balance the need for standards and regulation with new product innovations? I'm Sandra Peter and to discuss the challenges of the international banking system I'm joined by the Bank of Finland's Dr Iikka Korhonen and from the Australian Bankers' Association Mr Aidan O'Shaughnessy. Dr Korhonen is an economist and head of the Bank of Finland's Institute for Economies in Transition. Aidan O'Shaughnessy represents the interests of Australian banks to both local and international banking regulators and given the announcement of a Royal Commission into the Australian banking sector, Aidan's professional life is about to become a lot busier. Both my guests were speakers at the Sydney Banking and Financial Stability Conference organised and hosted by the University of Sydney Business School.

Sandra: Aidan, Iikka, thank you for talking to us today. We want to think a bit broadly about the future of banking. Do you think we're in a period of relative stability or are there new exciting things coming along or really scary things coming along?

Aidan: I think worldwide and particularly in Australia it's quite an exciting period. Australia as a country as an early adopter of technologies we've embraced a lot of the payment systems and payment methodologies very very quickly. I think what you'll see in the coming years there is in early 2018 is the launch of the new payments platform - you could consider this platform the rails on which trains will drive along so it's a critical piece of infrastructure but what it will drive are a lot of new entrants into the market by which payments can be made. What these new entrants will offer, what products they will offer we don't know yet. I think just building the infrastructure is the first step of it. So it is an exciting time. You also have the banks in Australia. It's a highly competitive environment. Their digital offerings are evolving at quite a pace as well. They find that for their younger customers some of them have never been in a branch and their interactions with a bank start with a mobile phone. As you travel to work it transitions to a P.C. interaction while at work and then in the evenings after around 7pm it tends to transfer onto a tablet. So the banks' looking at how their younger generations interact with them are producing a lot of products that suit all of these different environments.

Iikka: Globally things are more stable now than they were five years ago, say banks in Europe and in some of the larger emerging market countries are now in much better shape than they were as I said five years ago and at the same time there's been huge changes in the technology surrounding banking sector and finance sector more general regarding both payments and payment systems but then also intermediation of funds themselves, they're more non bank players sort of helping companies to find financing for their investments.

Sandra: Can you give us a few examples of those?

Iikka: Well there are of course just fairly simple crowdsourcing applications in different parts of the world to do more technology nuanced and advanced platforms say person to person lending in China or in many other countries and of course poor regulators there are challenges in how to actually regulate, how to supervise these new players who are not traditional banks.

Sandra: We spoke a little bit about rapid technological innovation. What do you think that will mean in terms of regulation? Will we think of new types of banking regulation or will we still try to adopt the ways in which we think about traditional banking today to these new players?

Aidan: I think particularly for the Australian aspect that May 2017 budget last year the government announced that APRA would have some additional powers to collect data on what we're calling the shadow banking sector and now that would include peer to peer lenders and marketplace lending. I think this is a good early first response just to have for APRA and the Reserve Bank to be able to gather data to understand what the market is. Obviously they're collecting from a systemic stability and prudential point of view but it should be data that informs any future regulation of any sector and this is a good first step. I think the challenge every regulator has is that you don't want to go too early because then you would destroy the market but you don't want to be seen to be going too late after a market failure as well. So that challenge...there is that balance that needs to be achieved by regulators. If you were to err on one side, Australia is a highly regulated jurisdiction so there is going to have to be a level of risk taking by regulators and government to allow these smaller players to compete and to grow and to offer products I think that's one of the few ways that Australia can compete on a more global level. There are other countries around the globe that are much further ahead than Australia is in fostering this type of industry sector and allowing them to grow because this type of technology doesn't recognise borders if it works in one jurisdiction that it can be easily transferred elsewhere. And that's one area that the Australian Government needs to step up and help the smaller players to compete.

Iikka: I think that is the key issue for all regulators all over the world - how to sort of maintain neutrality of other regulations. If there are new players and new intermediators of our funds you have to regulate them. But it cannot be the same regulation as for banks. How do you maintain that level playing field of one set of players that advantage or disadvantage in comparison to others. It would be a very tricky balance to strike but of course you have to try to do that otherwise things might go wrong.

Sandra: Do you see anyone being sort of further ahead or doing this particularly well?

Iikka: Different countries have different strengths. I think China has actually progressed remarkably well in integrating the online retail chains with financing. Of course it's helped by the fact that the market is in many ways closed so the domestic players have more power to do that. But then also in more traditional banks, there are banks like Spanish BBVA it's actually very unfast in various aspects of fintech.

Sandra: Aidan, anyone Australia is looking at for a good example?

Aidan: I think the Australian banks, obviously Asia is definitely one area just referencing China again the use of currency in China is dropping rapidly - payment apps like WeChat you can walk down the street and at a street vendor you can pay online.

Sandra: Recently street beggars. I was in China and the beggars have a...

Aidan: Is that right? And Sweden is one country as well that is looking more and more like a cashless economy. Israel is by far out in front in the areas of cyber security and cyber resilience and have a lot of smaller companies there. We can also look at the more traditional areas like Silicon Valley in the US. That's not to say Australia is far behind. Pretty much of the digital offerings if you look at a chart of how bank customers interact the preference in Australia is very much via online mediums and banks in Australia have responded to that. So we're finding that the branch is used less and less and the digital interactions are much more important for a customer. Therefore banks put a lot more importance on those offerings being of a high quality.

Sandra: So I want to take you both back a little bit to big tech companies - you've brought up China as an example and we have players like Alibaba entering the scene and also out of the US we'll have a lot of the big companies in the US and China having a range of licenses in the banking sector. Do you see them as becoming increasingly important players and how should regulation look at them in the future?

Iikka: I mean they are already major players in most markets. As I said the regulators have to try to strike a balance between being neutral and providing a level playing field and then making sure that the system is resilient and stable. If one player or set of players become too dominant then that might have implications for systemic stability and that's also something not just a competition aspect of the systemic stability aspect has to be taken into account. I don't think these companies are out there yet but it's something that regulators have to think about.

Sandra: Aidan, do you think they're getting closer?

Aidan: I would just have to agree with everything said.

Sandra: You mentioned in the beginning people interacting quite differently with the banking sector and this might be young people using mobile phones or mobile technology to access that or people being exposed to services offered by the big tech companies in terms of finance and banking. Is this impacting the way we think about trust in these institutions? Is this impacting the way that regulators are trying to pre-empt some of the moves that maybe consumers will do today that are a lot riskier than what we would traditionally see in the banking system?

Aidan: The research we've done in the Australian Bankers' Association there is still a level, and across all age groups, of a high level of trust in banks. There is a level of trust that our banks will take care of your data, in this age of data breaches, banks come up far and ahead of being one of the industries that will protect your customers data and it is important for both the customer and the bank but that lifelong relationship with your bank that perhaps people my age and older would have had is getting less and less, so the human interactions are getting less and less and these are probably key things where a long standing relationship is built. What that is being replaced with is the interaction between yourself, your device, and your bank. And I think that's where banks have said well it has to be the best offering we can possibly have. The disadvantage is that you lose that personal touch even though the branches are still available but the advantage you have then as a technology evolves you can interact with your bank and a much more personal service so they'll have a view of you via technology and there'd be a possibly able to offer you a better product or a better service based on the information that's available between you and your device and the bank.

Iikka: I think this will also transform banks. Of course banks have become much more efficient during the past two or three decades. There might be still some way to go. In my country Finland almost all consumer loans are basically accepted by some sort of algorithm. There's no human interaction. The banks are actually moving towards having the same sort of procedures for housing loans. So there's less need for not even routine but routine-like human labour.

Sandra: Speaking of human labour, will this impact the people that are working in the banking sector, we're talking about the future of banks there is quite a number of people employed in the banking sector in Australia is this sort of technology coming in the fact that many of these things are managed by algorithms, is this impacting the workforce in the banking sector?

Aidan: In all economies across the world, there are some jobs that due to advances in technology will no longer be required. The importance I think for Australia is that there are going to be new jobs in the future. Not quite sure how they'll look but they will be driven by technology. We have got to where we've got today moving from the horse and cart to the car to modes of transport, as the economy evolves and grows and technology grows jobs have grown as well but they've evolved they're different now today as they will be in the future. The critical thing I think for any jurisdiction, any country, is that the students that are coming out of the universities that they're equipped for this. So the focus on the sciences and the mathematics and technology is becoming more and more critical because it's how we as humans will live in the future and understanding that and being involved in those industries will be critical.

Iikka: Just to add on that, of course if and when some people are misplaced by automation in one way or another there has to be some form of retraining or something similar so that people are actually able to get the new jobs that have a higher productivity and because they have higher productivity then the companies are actually able to pay higher salaries because then the alternative is that they become unemployed and then that unemployment might turn into long term unemployment which is not beneficial for the individual but also it's very detrimental for the whole economy.

Sandra: To wrap things up, two questions I want to ask you one is around what are you most excited about if you're looking towards the future of banking, where is the area that you see most promise in?

Aidan: So the future of banking I think and I'll also probably go back to the Australian aspect, things that excite me is the new payments platform coming in 2018. It is, as I called it early on, just rails but it is the first vital piece of infrastructure. I don't know what kind of carriages or products will be built upon it but I know they will be unique and what's good about Australia is we're early adopters of technology so it will move quickly and the offerings will move quickly. The other areas I think is that the focus for the banks are fintech technologies. So I know everybody says that fintechs will disrupt the banks and to a degree they will because competition always disrupts. But the banks themselves are sitting down and thinking about how they can develop their own technology so they're partnering with fintechs which is probably one of the best business models you can have so there's capital behind creative people who can drive forward these ideas. Exciting part for the banks is that they already have a customer base where they can interact and push these products so it is fail fast, fail early and fail often but eventually some products will come out. I think Australia in the last decade was seen as very much in the forefront on digital technologies. We've slipped a little bit in recent years but this renewed focus on fintech disruption has focused bank boards and they very much are funding the future of their banks and understanding that it will be the digital age and the digital technologies that bring them to the next few decades.

Iikka: I just agree 100%. I'm sure in 10 years time we will be using products that we haven't even thought about yet. There will be something new, something exciting coming.

Sandra: Anything that gives you pause, that you think we should be cautious about, that concerns your looking towards the future of banking? What's the area you're most concerned with or most cautious about?

Iikka: I guess the flip side of the technological progress is that it might be that it's not the banks that survive. Some other operators and then the regulators have to struggle in how to actually supervise us, how to deal with these new institutions that are not like banks of old, they are something new and we have to sort of devise ways to deal with these new institutions.

Aidan: For me the topics of cybersecurity and cyber resilience and the fact that not only do institutions have to have a level of responsibility around the data that they hold but the individual needs to have a level of responsibility. So not just banks, not just the customer, but any interaction we have online, social media platforms, there should be a level of responsibility for all entities within the digital sphere to protect customer's data and a recognition as well of customer sovereignty over their data that it's not shared because once it gets out there it's out there and it's something that every individual has a right to and should be allowed to keep. Now banks before the digital age have had many years of protecting customers money and their data, that level of trust exists but as we move into the next decade there's a lot more players. So that is an area where gives me pause saying well how do we, with a bigger population of players within the industry, how do we continue to protect the customer and their data?

Sandra: Iikka, with all this increasing complexity how do we think about educating the public about these sorts of issues?

Iikka: So socially, one of the biggest challenges in all countries for example the discussion around Bitcoin and other crypto currencies is one example that we are warning people that you know this is not currency and it's an asset that is very volatile and price can go up and down. I don't know how well we are actually listened to at the moment but it is something that the authorities and banks just have to keep on doing and hope that over time the general public becomes more aware of products but also the risks that are inherent in these products.

Sandra: Aiden, in Australia?

Aidan: Yeah I think it's the same message. Identify the risks and I think it's up to regulators and governments and players within the industry to continue to communicate those risks and it's going to be a task that never ends, it will probably have to be done constantly and that message should evolve slightly to reach the widest population but it's a message of ongoing education.

Sandra: Iikka, Aidan, thank you so much for talking to us today.

Aidan: Thank you.

Iikka: Thank you very much.

Outro: You've been listening to Sydney Business Insights - the University of Sydney Business School podcast about the future of business. You can subscribe to our podcasts on iTunes, SoundCloud, or wherever you get your podcasts. And you can visit us at You can hear our entire podcast archive, read articles, and watch video content that explore the future of business.

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