With cryptocurrencies and new market entrants expected to impact the entire financial services sector, businesses need focus on the opportunities that will have the most impact on their customers.

The pace of change in the Australian financial services industry is accelerating. It's a challenge for organisations across the sector as they contend with technological opportunities, consumer demand and new competition. And for regulators, keeping up is extremely difficult.

In MinterEllison’s recent Financial Services in Focus survey, our financial services clients identified the rise of cryptocurrencies and the dominance of Big Tech (such as Google, Amazon, Apple, Meta and Microsoft) as particular concerns.

Almost two-thirds (63%) of the financial services organisations we surveyed said they expect changes and reviews around payments systems and cryptocurrencies over the next two years.

More than a third (34%) expect increased competition from new entrants to the market, such as fintechs and buy now pay later (BNPL) providers, over the same period. Additionally, 50% expect increasing competition from non-financial players like Google and Amazon.

In your personal view, considering the future of financial services in Australia, which of the following do you expect to see over the next 24 months?

Different parts of the financial services sector will be affected differently by changing payment systems and the rise of cryptocurrencies. For banks, this is an immediate issue as many explore new technologies and the prospect of accepting payments in cryptocurrencies. For other sectors of the market, they may view cryptocurrencies as too speculative for investing in. However, few organisations are likely to be immune to the impact of new technologies and market entrants.

Every part of the financial services sector is subject to a very different competition profile than it was 10 years ago. And every single part of the sector is vulnerable to disruption.”

With the Australian Government considering how to regulate cryptocurrencies and update the regulatory framework for payments, the regulatory burden on organisations will almost certainly increase over the next two years. This process, commenced by the Coalition Government, has bipartisan support and will continue with the Labor Government.

New technology and growing consumer demand for frictionless digital experiences means many organisations will need to rethink how they deliver products and services. Some businesses may find their market share eroded by increased competition.

However, to achieve genuine value, organisations need to focus their attention on the areas that will impact and improve on their services to clients.

New regulation around cryptocurrencies and payment systems

The buzz about cryptocurrencies is nothing new. Cryptocurrencies have been around for 15 years. However, as their influence and prominence grows, governments around the world are trying to regulate it – though until recently, they had been hesitant to do so due to its complexity. While several nations, including Panama and Singapore, have implemented regulatory frameworks for crypto assets (including cryptocurrencies), the race is on to create a definitive model for what this should look like – and Australia, the US, the European Union and the UK are all exploring their options.

In Australia, the federal government has proposed a licensing regime for crypto assets modelled on existing financial services licensing regulations.

Although still in the consultation phase, this regime will require regulators to consider how rules can be designed to govern the providers of crypto assets rather than the assets themselves, as these are constantly changing. Regulators must also consider the costs to Australian investors holding those assets, and how to shield investors from data protection and security risks.

Despite this, the fundamental premise behind the multijurisdictional is approach is challenging. While governments around the world are trying to be the jurisdiction or regulator that coins what a digital or crypto asset is, there's no global agreement on it.

"The industry really needs a global standard, because crypto by nature is global - it's not something that's meant to be specific to a country or a jurisdiction," Associate Amanda Khoo says. "We need a global stance that allows us to transcend these issues." For payment systems, regulation is currently fragmented. It's not always clear how it applies to different service providers, especially since technology has evolved but payment systems laws have remained the same. In the market, there are established players like Amex, Mastercard, Visa and banks. But now there are several intermediaries that sit between consumers, merchants and those service providers. Those intermediaries play a crucial role in providing for a faster and quicker way to process payments, but Australia's payments framework is not currently set up to deal with these new emerging technologies and players.

The ongoing challenge for policymakers is finding the balance between policy settings that ensure Australia is an attractive destination for investment in these technologies but provide protection for consumers.

Financial services leading the charge for new opportunities

The proposed regulatory changes come when many financial services organisations are already exploring how emerging technologies can be used to develop new products and business models. This is in response to growing consumer demand for better, more accessible digital offerings and increasing competition from new entrants to the market, including BNPL providers and Big Tech offerings such as Apple Pay.

The Commonwealth Bank of Australia, for example, were on the verge of allowing customers to buy, sell and hold cryptocurrencies through the CommBank app.

This was recently paused following the TerraUSD collapse, which saw an algorithmic stablecoin meant to be pegged to the US dollar plummet in value, erasing about US$45 billion in value. However, despite these teething issues, which demonstrate the risky environment in which cryptocurrencies operate, the importance of cryptocurrencies remains. Its long term value to the global financial services market has not been diminished – though proper protection and education are essential to manage that risk

“It [cryptocurrency] offers us all faster service, much lower costs, and more inclusion, but only if we separate apples from oranges and bananas,” said IMF managing director Kristalina Georgieva at the World Economic Forum meeting, noting the difference risk levels between different assets.

Embracing innovation can be challenging for established financial services businesses, which are traditionally risk adverse and highly susceptible to disruption. But doing so gives organisations big opportunities to meet the growing customer expectations for frictionless transactions.

For example, some fund operators with an existing customer base and pool of funds are partnering with a payments provider. In the US, City National Bank has partnered with fintech Extend to offer its business customers virtual Visa cards that can be distributed to employees and contractors without sacrificing security.

Other organisations are creating their own digital wallet to allow customers to use their funds for purchases.

Organisations looking at these options need to consider whether there will be compelling reasons for their customers to take up the proposed new payment offering and match that with strong procedures to safeguard customers assets and manage cybersecurity risks.

Meanwhile, new corporate structures like decentralised autonomous organisations (DAOs) – member-owned communities without a centralised leadership, and built with distributed ledger technology – are being used to track and certify supply chain credentials. For example, some look at organisations’ environmental, social and governance credentials. We are also seeing interest in DAOs being used as a vehicle to raise capital. That raises its own set of issues given a DAO is not a separately recognised legal entity/corporate structure.

Other organisations are using non-fungible tokens – tokens that represent ownership of unique items – to reward customers’ loyalty. At the same time, established businesses have opportunities to invest in or partner with start-ups to foster the beyond-the-horizon thinking needed to expand outside their core business.

It's important that organisations understand what’s driving the government’s proposed regulatory changes, so they can be active participants in shaping their own future.

For the financial services industry, one of the biggest issues is the lack of education for consumers. Consumer protection, alongside opportunities to innovate, are driving the regulatory changes that we're seeing. But the landscape evolves faster than the regulation can. Organisations dealing with these issues every day can shape the regulatory strategy moving onwards, drawing on lessons from overseas.

Delivering genuine value for customers

Financial services organisations need to be bold to succeed in this rapidly evolving landscape. However, with considerable ‘white noise’ surrounding new and emerging technologies, organisations must also remain focused on their core value proposition. Instead of being swayed by the hype about a technology, organisations need to ask how that technology aligns with their service, and how it could augment that service.

For this, they need specialist knowledge of new technologies and industry-specific insights from around the world.

By assessing technology decisions in a measured way, organisations can be confident they are not wasting money on projects that don’t benefit their customers or generate healthy revenue streams for the organisation.

Taking a stance on these technologies is a race, both from a regulatory perspective and for individual companies looking to get in on the action. But there is no point jumping on the bandwagon for the sake of it.”

Prayas Pradhan, Senior Associate