Academic journal article The Reserve Bank of New Zealand Bulletin

Disruption or Distraction? How Digitisation Is Changing New Zealand Banks and Core Banking Systems

Academic journal article The Reserve Bank of New Zealand Bulletin

Disruption or Distraction? How Digitisation Is Changing New Zealand Banks and Core Banking Systems

Article excerpt

1 Introduction

The banking industry has been confronted with 'digital disruption', 'digitisation' and 'digital banking'. These are all terms referring to the change in the banking system (and wider financial sector) as customers demand a more digital banking experience and firms outside of the banking sector, including technology firms, respond to these demands. However, it is not clear how deep this disruption of the banking industry is and how it might affect the stability of the financial system.

The Reserve Bank has a mandate to "promote the maintenance of a sound and efficient financial system" according to section 1A of the Reserve Bank of New Zealand Act 1989. In addition, part 5 of this Act mandates the Reserve Bank to regulate and supervise banks. Therefore, the Reserve Bank is interested in any disruption (digital or otherwise) to the banking system.

The article finds that digital disruption is currently focused on 'customer-facing' banking services, but it also could result in more fundamental changes to the banking system. (2) Banks are motivated to respond to the digital disruption in order to remain competitive, but a key challenge for banks is the current state of their core banking systems. While these core systems are effective at providing current banking services they limit banks' ability to provide new and seamless digital experiences for customers.

Digital disruption has not so far affected the stability of the financial system. There is potential for digital disruption to bring beneficial and detrimental impacts to financial stability. The Reserve Bank has not proposed any new regulations in response to the digital disruption of the banking industry, but will continue to monitor new developments and assess whether and when a regulatory response is required to maintain financial system soundness.

Section 2 describes the digital disruption of banking and its drivers, and section 3 outlines the banking services that are affected by digitisation. Section 4 describes the potential effects of digitisation on banks and section 5 discusses the strategies being adopted by banks in response to these impacts, including how banks are developing their core systems. Finally, section 6 assesses the potential effects of digital disruption on financial system stability.

2 Defining digital disruption

Banks using new technologies to improve their services is not a new phenomenon. Over the late 1980s to 1990s automated teller machines (ATMs), electronic debit and credit cards, and telephone banking started replacing paper-based payments. Then, through 2000 to 2010, basic banking products became digitally available through the introduction of remote access to bank accounts via mobile banking and internet banking. (3) However, these earlier digital trends were predominantly driven by the supply side (i.e. by banks themselves) to improve the cost efficiency of supplying banking services, and therefore improve profitability.

This current wave of digitisation is different to earlier periods of innovation in the banking industry in that it is primarily driven by consumers rather than banks. Consumers now expect more accessible, convenient and smarter transactions (using internet and mobile devices) when accessing and managing their finances, as they have experienced this convenience in other activities such as shopping and transportation. Advances in new technologies and the changing customer expectations have enabled non-bank firms, such as large technology companies (for example Amazon, Facebook and Google) and start-ups (for example PushPay, Moven and Harmoney), to provide innovative bank-like services and take a share of the banking industry profits. These firms can be referred to as 'disruptors'. Figure 1 provides a simplified overview of the digital disruption in retail banking.

The emergence of disruptors poses a threat to the traditional banking model and is referred to as the disruption of the banking industry. …

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