A KODAK MOMENT: Top regulator warns there's a massive tech problem building up in Australia's banking industry

Minority Report. (DreamWorks Pictures)
  • The head of Australia’s banking regulator says domestic banks have under-invested in key infrastructure for years.
  • In a speech today, APRA chief Wayne Byres strongly recommended that domestic lenders boost investment to improve processes.
  • Byres also highlighted the challenges faced by regulators in an environment of rapid technological changes.
  • And he said not all local banks will survive the competitive threats posed by new technology.

  • Australian banks are locked in a battle to stay one step ahead with new products using the latest technology.

    But the chief of Australia’s banking regulator has today issued a warning to the sector not to put the cart before the horse.

    In a speech at the the Curious Thinkers Conference in Sydney, Australian Prudential Regulatory Authority (APRA) chairman Wayne Byres said domestic banks which focus too heavily on new technology may pay a price for ignoring shortcomings in existing infrastructure.

    And he noted that “not every financial sector business or business model will navigate their way through the intense period of change we are experiencing”.

    Under-investment

    Byres said there’s the “understandable desire to invest in new technology-enabled products and services, coupled with the necessary investment in cyber security and risk mitigation”.

    And a number of financial institutions, particularly the major lenders, have seen material improvements in protecting their operations from cyber attacks.

    However, an industry review by APRA found many existing systems are at risk of becoming obsolete.

    The regulator’s technology team recently compiled two years worth of existing-system reviews, covering around 90% of the industry. And in the context of the ongoing battle to be the next tech leader, the results were “particularly problematic”.

    “For example, the reviews found a number of instances of critical systems — applications and infrastructure — at end-of-life or end-of-support, without funded remediation plans in place,” Byres said.

    “Moreover, there was also limited evidence of adequate escalation and clear reporting of these system health issues and the associated risks at executive and board levels.”

    In other words, the industry is behind the curve. And it hasn’t happened overnight — with Byres arguing the current shortcomings are the result of “persistent under-investment over a number of years”.

    “I’d stress that by stepping up their investment in operational and information security infrastructure, entities are not only fulfilling our prudential expectations; they are also giving themselves the best chance of not ending up on a list of once iconic but now extinct brands.”

    Open Banking

    Byres added that the existing data-processing capacity of domestic banks isn’t fast or efficient enough to accommodate an Open Banking system, ahead of new regulations which start in July next year.

    In theory, banks will be required to share customer data such as credit scores, with the expectation it will help drive competition in the sector.

    However, the reality may be different. And to explain why, Byres highlighted a recurring theme — poor existing infrastructure.

    He said current data management systems are based on a complex framework that is still heavily reliant on manual data processing.

    “As things stand, significant investment will be needed to meet the new obligations,” he said.

    Cloudy crystal ball

    Byres said a core by-product of improved technology is the financial industry’s shift towards outsourcing and partnerships.

    And that creates problems for regulators because without more resources, it makes it harder for them to “kick the tyres” on new deals.

    From a regulatory perspective, Byres said the risks are two-fold.

    First, they will have to monitor “possible fragmentation”, as smaller niche players challenge the status quo with specialised service offerings.

    And the second threat is somewhat opposite in its application — the risk of global tech giants taking market share from traditional finance. In the US, Amazon is already making plans to do just that.

    Byres said APRA is taking steps so that regulation meets reality, such as the issuance of restricted banking licences to “provide for easier entry – but not lower standards”.

    However, “like everyone in the industry, APRA recognises change is coming. But sadly, our crystal ball is as cloudy as everyone else’s”, Byres said.

    Byres noted that right now it seems “inconceivable” a major domestic financial institution could fail. But he concluded with a warning that no one thought other famous brands such as Kodak or Blockbuster Video would become obsolete either.

    For the finance companies that succesfully adapt, “APRA will insist that they are operated in a safe and sound way for the community”.

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