Will regulation strangle or enable 'quasi-banks'?

The answer seems to depend on where in the world you are, and who's backing these new entrants. News today out of Australia and China highlights two possible approaches.

In Australia, one of the promises brought into government by the conservatives who took power last year was a "root and branch" inquiry into the state of the country's financial system, with an eye toward deregulation. That inquiry, headed by former Commonwealth Bank CEO David Murray, kicked off in earnest this year. 

At a Financial Review and J.P. Morgan lunch in Sydney on Tuesday, Murray gave a clear indication that his inquiry would be leaning towards a light-touch regulatory approach when it comes to new entrants.

''Information technology is a big part of the inquiry because it is clearly going to take the financial system into whole new areas,'' Mr Murray said. ''So you could join up funds management with e-payments and create a virtual bank,'' he said as an example of future developments.

''The tough question for us is: do you allow these shadow systems to develop because you want to see innovation? So then you decide whether you need to regulate that in the interests of competition, safety or whatever? Or do you try and pre-empt and make sure that everything is completely safe.

''Different regulators around the world have different approaches. We definitely want the competition and we want the innovation.''

During the inquiry there will no doubt be lobbying and submissions from the big traditional banks, who will be looking to protect their dominant position and demonstrate that they're doing quite enough innovating themselves. And while they may win some battles and concessions, they're unlikely to be able to bring enough pressure to bear to shut out new competitors completely.

But that seems to be what's happening in China, where the government and its state owned banks are working together to make things difficult for privately owned new entrants looking to shake things up. E-commerce giant Alibaba has had its financial expansion plans hit hard on a number of fronts. 

People’s Bank of China have blocked efforts by Alibaba and Tencent to issue virtual credit cards linked to their online payment tools and settle payment using QR codes.

The Chinese central bank also said on Monday it would set limits on the amount people can spend using smart phone payment services.  

This is on top of the restrictions big state owned banks have introduced on the amounts depositors can transfer into online finance products. 

The regulatory line is one of protecting the economy from financial systemic risk and exercising prudence. But Alibaba would contend that it's protectionism from the government and banks in the face of more efficient and customer-centric competitors.