Competition in retail banking is under threat from too much regulation, according to a submission from the Customer-Owned Banking Association to the Senate Committee on Australia as a technology and financial centre.
The committee is examining the policy environment for neobanks and barriers to the uptake of new technologies in the financial sector.
"New entrants to retail banking, such as neobanks, and existing challenger banks, such as customer-owned banks, are critical to applying competitive pressure to the major banks," said COBA chief executive Michael Lawrence.
The COBA head said neo banks and customer-owned banks have a lot in common as challengers in a market dominated by the major banks.
"Neobanks and COBA members face the same regulatory and operating environment and that is an established oligopoly where the four major banks hold substantial market power over their competitors and consumers."
Lawrence cited COBA member Teachers Mutual Bank that recently launched a new digital bank Hiver targeted at firefighters, nurses, teachers, and paramedics.
He also noted that Regional Australia Bank is developing a strategy to compete in the banking-as-a-service.
”Policymakers and regulators need to recognise and respond to the impact on competition, innovation, and consumer choice of constantly ratcheting up regulatory compliance costs," added Lawrence.
"The increasing diversion of scarce resources away from customer service and innovation to meet new compliance obligations hits challenger banks hardest and gifts a competitive advantage to major banks.
Lawrence said the ultimate losers from this entrenched trend are all banking customers who need a vibrant, dynamic, and innovative retail banking market.
"The regulatory compliance burden is applying a python squeeze to competition in retail banking.
"Policymakers and regulators must urgently change course, to deliver better regulation and better regulatory policymaking.
"We have provided a set of recommendations that will improve the policy environment facing the financial services sector, but particularly for neobanks and customer-owned banks given the burden of regulation is much more acute for these institutions than their major bank peers."