Australian Banking Sector Reforms and Payments System Modernization: Regulatory Tailwinds and Long-Term Profitability for Major Lenders

The Australian banking sector is undergoing a transformative phase driven by regulatory modernization and technological innovation. At the heart of this shift lies the Treasury Laws Amendment (Payments System Modernisation) Bill 2025, which codifies a new regulatory framework to address the rapid evolution of financial technologies and payment systems [1]. This legislative overhaul, coupled with the systemic integration of the New Payments Platform (NPP), is reshaping the competitive landscape for major lenders like Westpac and ANZ, creating both challenges and opportunities for long-term profitability.

Regulatory Tailwinds: A Framework for Innovation and Resilience

The modernization of the Payments Systems Regulation Act 1998 has introduced a licensing regime that allows non-bank Payment Service Providers (PSPs) to access payment systems directly [1]. This democratization of the payments ecosystem is fostering competition, driving down costs for consumers, and incentivizing banks to innovate. For instance, the NPP—already facilitating real-time payments via identifiers like email and mobile numbers—is projected to become a cornerstone of Australia’s digital economy. By 2033, the digital payment market is forecasted to grow from USD 118 billion in 2024 to USD 667 billion, driven by adoption of A2A (account-to-account) transactions and embedded finance [3].

The Reserve Bank of Australia (RBA) is further amplifying this momentum by aligning the NPP with global initiatives like the BIS Project Nexus, aiming to harmonize cross-border instant payments [1]. These developments position Australia at the forefront of a global shift toward frictionless, real-time financial infrastructure—a trend that could enhance the operational efficiency of banks while expanding their revenue streams through value-added services.

Strategic Adaptation: Westpac and ANZ’s Digital Transformation

Westpac and ANZ are proactively adapting to these changes through strategic investments in digital infrastructure. ANZ’s dual-platform strategy—comprising ANZ Plus (consumer) and TransActive Global (business)—has already yielded tangible results. In its 2025 half-year results, ANZ reported a record $11 billion in revenue and a 13% year-on-year increase in cash earnings per share, attributed to lower customer acquisition costs and higher engagement metrics [3]. The bank’s focus on real-time payments via the NPP has streamlined recurring transactions, reducing manual reconciliation costs and improving customer retention [1].

Westpac, meanwhile, has prioritized fraud prevention and real-time transaction security as key differentiators. Its 2023 CET1 capital ratio of 12.4% underscores its financial resilience, enabling continued investment in NPP-enabled services like PayTo and PayID [4]. By leveraging blockchain and AI-driven analytics, Westpac is enhancing its ability to detect and mitigate risks in an increasingly tokenized payments environment [1].

Indirect Financial Impacts: Cost Savings and Revenue Leverage

While direct profitability metrics tied to regulatory changes remain opaque, indirect benefits are evident. For example, the NPP has generated AUD 3.6 billion in net benefits for small businesses in 2024 alone, with 33% of adopting merchants reporting revenue growth [1]. This bodes well for Westpac and ANZ, whose retail and SME banking segments stand to gain from increased transaction volumes and customer loyalty. Additionally, the shift to real-time payments is reducing operational overheads—such as batch processing and reconciliation—freeing up capital for innovation [1].

The regulatory environment also presents cost pressures. Basel III reforms, finalized in 2025, have mandated higher capital buffers, potentially squeezing profit margins for banks [3]. However, institutions like ANZ are offsetting these costs through productivity gains. ANZ’s fivefold increase in daily tech releases has accelerated the deployment of security upgrades and customer-centric features, enhancing its competitive positioning [3].

Long-Term Profitability: Navigating Risks and Opportunities

The long-term success of Westpac and ANZ will hinge on their ability to balance regulatory compliance with innovation. The RBA’s exploration of digital currencies and tokenization in wholesale transactions could unlock new revenue streams, particularly for banks with robust digital infrastructure [3]. Conversely, non-bank PSPs entering the market under the new licensing framework may erode traditional fee-based income.

Investors should monitor how these banks leverage the NPP’s data-rich payment capabilities to offer personalized financial products. For example, real-time transaction data could enable dynamic credit scoring or embedded insurance solutions, creating sticky customer relationships and diversified revenue sources [1].

Conclusion

The modernization of Australia’s payments system represents a pivotal inflection point for major lenders. While regulatory tailwinds like the NPP and updated licensing frameworks introduce short-term compliance costs, they also catalyze long-term value creation through operational efficiency, customer retention, and new revenue avenues. Westpac and ANZ, with their strategic digital investments and capital strength, are well-positioned to capitalize on these trends—provided they continue to innovate at the intersection of technology and customer experience.

Source:
[1] Australian Payments – Navigating complex regulations for growth in 2025 [https://www.temenos.com/blog/australian-payments-navigating-complex-regulations-for-growth-in-2025/]
[2] Treasury Laws Amendment (Payments System Modernisation) Bill 2025 [https://codifylegalpublishing.com/blog-article/codify-analysis-of-treasury-laws-amendment-payments-system-modernisation-bill-2025-australia-48th-parliament]
[3] Australia Digital Payment Market Size and Forecast to 2033 [https://www.imarcgroup.com/australia-digital-payment-market]
[4] Westpac 2023 Financial Performance [https://www.sec.gov/Archives/edgar/data/719245/000110465923115005/webnf-20230930xex15d2.htm]