Chapter 3: Innovation
The arrival of digital technology — the synthesis of computing and communications technology — marks the advent of one of the most ubiquitous generally applicable technologies the world has ever seen. Its impact has been, and continues to be, revolutionary for most industries, altering business operations and resulting in major productivity gains.
For the financial system, technology-driven innovation is transformative. New business models, products and services are emerging, driving competition and changing the way users interact with the system. Opportunities for innovation are abundant as, fundamentally, the sector revolves around recording, analysing and interpreting transactions and managing associated information flows. With no physical products to manage, these processes readily lend themselves to improvements via digital technologies. Consequently, the sector has already invested significantly in a range of technologies, leading to:
- Increased self-service. The introduction of the ATM represented a major first step towards self-service. More recently, it has been followed by online banking and insurance products, and the growth of comparator sites.
- Evolving infrastructure and delivery models. Cloud computing, real-time online ‘chat’ services and mobile payments platforms are changing the physical infrastructure used in financial services’ operations and delivery.
- Alternative business models. Technology is facilitating the disintermediation of traditional institutions, attracting many new entrants and non-traditional businesses. New technology-enabled mechanisms for accessing finance and obtaining credit are emerging in the Australian market, such as crowdfunding and peer-to-peer lending.
- Fast, frictionless payments. Electronic payments are growing in volume and progressing towards real-time funds transfers. Friction is diminishing with contactless terminals and the growing use of biometrics for payment authorisation. Some consumers are also accessing alternative mediums of exchange, such as digital currencies.
- Increased use of data. The financial sector’s ability to capture, store and analyse vast amounts of data enables firms to customise products for consumers, more finely segment customer groups and sharpen targeting of marketing initiatives. It is also improving risk modelling, risk-based pricing and research.
- Increased potential for international integration and dependency. Users and intermediaries can access international products, services and markets more easily, and foreign players have more opportunities to enter and compete in local markets.
As observed in the Interim Report, the disruptive effects of innovation have the potential to deliver significant efficiency benefits and improve user outcomes, notwithstanding costs associated with adjustment for industry, and possible uncertainty for some consumers about change.
As technology continues to increase network speeds, broaden distribution networks and heighten levels of interconnectivity, these changes can also amplify the risks of innovation across the system. The pace of technology-driven market developments can challenge regulatory frameworks and make it difficult for regulators to adapt with sufficient speed. Failure to manage these risks may result in system-wide impacts and/or adverse consumer outcomes.