After a turbulent 2020, the banking and finance sector looks to undergo further transformation as the market emerges from the disruption of COVID-19 and adjusts to a more regulated and diverse banking landscape.
Response to Banking Royal Commission
The flow-on effects from the Banking Royal Commission will continue to impact Australia’s banking and financial institutions as they respond to more legislative reform in 2021. The Commission’s recommendations and resultant regulations have made banks focus on getting their house in order with many banks tightening their lending practices and increasing rates in response to rising compliance costs. This has seen fewer financing options available to SMEs, family businesses, start-ups and industries badly affected by the pandemic. In 2020, bank debt in commercial real estate significantly increased as the banks moved away from riskier residential and retail assets. A trend toward lending in sound, more sophisticated industries is likely to continue with the introduction of mortgage broker reforms from January 2021 and the design and distribution obligations scheme from October 2021.
Continued growth of alternative lenders
The alternative lending market continues to grow, spurred on by the economic impacts of COVID-19, technological innovation in the banking industry and a reduced risk appetite from the major banks. The number of fintechs in Australia rose significantly in the past twelve months, as interest increased in digital products and e-commerce during the pandemic and their products were quickly adopted by consumers. Alternative lenders were able to benefit from the major banks’ reluctance to lend to businesses significantly affected by the pandemic, providing an easier finance option for business to rebound from COVID-19. Alternative lender activity in the property market is also expected to increase in 2021, with many property investors attracted to the tailored, long-term lending product and service offerings that are available in the alternative lending market.
COVID-19 accelerated the digital banking revolution with many banking and financial institutions bringing forward planned investment in digital products and services and implementing new electronic payment mechanisms and digital service offerings. This trend is likely to continue as traditional banks look to remain competitive against fin-techs and utilise artificial intelligence to meet the demand for personalised and efficient digital finance products.
The open banking regime will continue to transform the banking and lending market as industry participation in the regime grows throughout 2021. The scheme is designed to place consumers in control over their financial information held by banking and financial institutions including the ability to share this data with third parties such as other banks, credit unions and fintechs. The scheme was launched in July 2020 for the major banks and is expected to include data from most Australian banks and financial institutions by February 2022.
Industry participation in the scheme will grow during 2021 as the Australian Consumer and Competition Commission provides scheme accreditation to more financial institutions. The scheme is likely to encourage competition between banks, financial institutions, and alternative lenders, allow new players in the lending market and deliver more innovative products and services.
This article provides general comments only. It does not purport to be legal advice. Before acting on the basis of any material contained in this article, we recommend that you seek professional advice.
Chris Floreani, Principal in our Transactions Team
Phone: +61 8 8210 2251
Peter Makestas, Law Graduate in our Transactions Team
Phone: +61 8 8210 2245