Looking across the Tasman to Australia, one cannot help but marvel at the innovative strides made in finance. From Nano Banks to Digital Banks offering solutions for Gen Y and Millennials, Australia has showcased a fertile ground for financial innovation addressing diverse social challenges. It raises the question: why does New Zealand, a nation that invented EFTPOS, seem to lag in financial innovation?
It seems that our Government is pondering the same question. A couple of days ago, I stumbled upon a compelling quote from Nicola Willis' speech at the 2024 New Zealand Economics Forum: "We want our country to be seen as a haven for talent, capital, and innovation. Open for business and hungry for investment. The make-it-happen capital of the Asia Pacific." These words resonated with me, prompting a reflection on the state of innovation, particularly in the banking and finance sector in New Zealand.
Innovation is not just technological advancement but rather a wide spectrum of questions that we should challenge. These include the development of new products and services we offer, the ways we interact with our customers, how we fund our businesses, our ethical and sustainable considerations and different ways we think about and mitigate risk. Everything we do should be challenged, refined and innovated through understanding our customers' needs.Â
Challenges hindering financial innovation in New Zealand:
1. Small population
New Zealand's small population of 5 million might seem like a barrier to economies of scale. However, it can also serve as a unique advantage. A smaller population allows for a controlled testing ground for new ideas within a manageable ecosystem.
2. Brain drain
The allure of travel and attractive salaries abroad often leads to a 'brain drain' of young and intelligent individuals. While this phenomenon is not unique to New Zealand, enticing these individuals back after gaining diverse experiences abroad remains a challenge.
3. Regulatory hurdles
Financial services compliance, involving various regulatory bodies like the Commerce Commission, FMA, RBNZ, and OPC, poses a significant challenge for new entrants. The upfront investment required to meet compliance obligations often outweighs early revenue, hindering innovation.
4. Capital constraints
The lack of capital, exacerbated by the RBNZ's capital requirements framework favouring residential property lending, forces start-ups to heavily rely on limited Venture Capital and Angel Investor options. New Zealand's comparatively smaller VC market further limits funding opportunities.
5. Risk aversion
The risk-averse nature, reflected in both individual and institutional investment choices, concentrates focus on housing and physical assets. This perpetuates a cycle where investments shy away from perceived risks, hampering innovation and productivity growth.
6. Tall Poppy Syndrome
The cultural phenomenon known as "Tall Poppy Syndrome" may contribute to hesitancy in celebrating individual success. Instead of acknowledging hard work and innovation, success is sometimes dismissed or attributed to privilege, stifling the entrepreneurial spirit.
Nicola Willis' vision for New Zealand as a hub for talent, capital, and innovation is commendable. To realise this vision, structural obstacles hindering innovation must be addressed. The financial sector needs to overcome regulatory complexities, attract and retain talent, and foster a culture that embraces risk and celebrates success.
Encouragingly, there is an opportunity to learn from the successes of neighbouring nations and adapt strategies that align with New Zealand's unique strengths. It requires a collaborative effort from policymakers, industry players, and the community to create an environment where innovation can thrive.