Why do Australia’s big four banks keep getting bigger?

Written by || October 26 2022

The proof of the tentative state of Australia’s bid to introduce greater competition into its financial services sector is in the pudding: The country’s big four incumbent lenders have increased in size despite the high-profile launches of different neobanks in recent years. Of that crop of upstarts, the last one left standing is Judo Bank. The others have either collapsed or been acquired. Meanwhile, the big four are arguably stronger than ever.

The combined assets of Australia's biggest banks — Australia and New Zealand Banking Group (ANZ) Commonwealth Bank of Australia (CBA); Westpac; and National Australia Bank (NAB) — reached AU$4.29 trillion as of June 22 from AU$3.93 trillion a year earlier, according to data from the Australian Prudential Regulation Authority. As noted by S&P Global Market Intelligence, this makes up more than 72% of the AU$5.95 trillion assets of the country's banking sector. Assets of all of Australia’s other local banks added up to just AU$796.71 billion.

This is not how it was supposed to be, at least not based on the findings of Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Royal Commission found that the big four had acted as an oligopoly in many ways to the detriment of customers and recommended introducing greater competition into Australia’s banking sector to force the incumbent juggernauts to improve.

In February 2019, Rod Sims, then chairman of the Australian Competition and Consumer Commission, told the Financial Times, “Market economies only work properly if you have competition and we have to make sure there is more in banking.

“We have to fix the cozy oligopoly,” he said of the Big Four. “They have to feel under threat.” 

Not for lack of trying – Australia did introduce open banking and greenlight several neobank challengers – but the big four have been difficult to unseat, especially in retail banking. Neobanks like Volt, 86 400 and Xinja burst onto the scene and tried to directly compete with big incumbent lenders for retail customers. The trouble is that most retail customers do not casually switch their primary bank, and attracting them to even open a secondary account is expensive. The main way neobanks do that is with subsidies such as high-interest deposits.

Such a strategy is untenable. Both Xinja and Volt eventually collapsed because they ran out of cash. 86 400 likely saw the writing on the wall if it chose to go it alone and agreed to be bought out by National Australia Bank (NAB). The acquisition was announced in February 2021 and completed in December 2021. NAB has used 86 400 to accelerate the growth of the incumbent lender’s own digital bank, UBank.

The irony of one of the big four acquiring a neobank intended to be a competitor could not have been lost on Australian regulators, but they did not have a solid reason to block the deal either. After all, if 86 400 ended up going the way of Xinja and Volt, would that have been better?

Meanwhile, the cash-rich big four continue to shop around for acquisitions among their smaller rivals. This pressure on smaller banks is only set to increase once ANZ’s AU$4.9 billion purchase of Suncorp Group Ltd.'s banking arm is completed. Announced in July, it will be Australia’s biggest banking deal in more than a decade and should help ANZ become No. 3 nationally in terms of mortgages and retail deposits.