New Game, New Rules

In his famed ancient text ‘The Art of War’, Sun Tzu emphasised the illusion and reality of power. Tzu explained how an army’s opportunity comes from openings in the environment which are created by a weakness of the enemy, and their inability to respond to changes on the battlefield. Translation: strength doesn’t come from size, rather from the ability to see an opportunity that others don’t.

Some 2000 years on, Tzu’s lessons have never been more pronounced than on the battlefield that is the Australian financial services industry.

It wasn’t that long ago that the industry was all playing the same game in a common environment. But then a lot of players got distracted. Financial crisis, misconduct, Hayne, large scale remediation and the illusive quest for ‘trust’.  And whilst this was happening the battlefield opened, fueled by the rapid forces of technology and digitisation.

And who is dominating the new game? The payments industry. Quite simply because under this new game the currency is data, not deposits.

There are however further, irreversible trends at play that have enabled the spectacular rise of payments and digital assets in Australia.

1. Behaviors have changed. In the last year, over 60% of payments were contactless, in the same time that credit card balances decreased by almost a quarter. New payment models will soon dominate the incumbent card-based platforms, and whilst technically cash is still King, we predict the end of his reigning era.
2. The adoption of real-time payments has grown. Accelerated by the emergence of overlay services and other alternative cashless transaction options (e.g. digital wallets) it is likely this industry will bring an end to traditional payment methods.
3. Crypto and Stable coin use is increasing, whilst Central Bank Digital Currencies (CBDC) are advancing – rapidly. China are committed to roll out the digital Yuan in time for the Winter Olympics next year. The Reserve Bank of Australia is experimenting the feasibility of a wholesale CBDC and whilst there is currently no compelling use case for a retail CBDC, we believe that this view will change imminently. It is estimated that one in six Australians currently own crypto currency, and it’s in the hands of the generation that over the next ten years will also be the recipients of the largest intergenerational wealth transfers this country has seen.
4. Data is democratising. The Open Banking regime will disrupt the traditional monopoly of data holding by opening access to, and creating data as a consumer right. Tech players such as Amazon, PayPal and Alipay will rise with the tide in an environment where data is highly fluid, and consumers have the ability to curate it in a way that is meaningful to them.

These accelerating trends are inevitable, and the financial services industry needs to understand and watch them closely to identify opportunities to maintain, and or grow revenue and margins. Some will guard against complacency, whilst others will take a longer term view, prioritise investment and make the change required to ensure future success.

Several Senate and Regulatory driven inquiries are currently underway which are seeking to address critical questions, and allow government and regulators to form a “house view” on the future landscape. Critical to the success is the need to define and embed a regulatory framework for the new game, one that promotes Australia as a global leader in innovation in the financial services industry and where Australian consumers are protected.

Our overarching observation of the current landscape – a new game has emerged, and the success of defining the new rules cannot be downplayed as a trend. The role that banks have traditionally played, as the cornerstone of the industry will change. In a world where fiat currency is replaced with a CBDC, and where capital is allocated based on decisions made using data models and artificial intelligence the need for ‘safekeeping’ deposits and allocating loans will be challenged. And whilst many incumbents are waking up to the change and applying new rules, they are ultimately still playing the old game.

More to come…