New regulations and changing consumer preferences are changing the face of Australian banking, a report from EY says.

And if the latest results from the major banks are anything to go by, the sector looks increasingly prone to disruption once new Open Banking laws come into effect in February.

While the big four banks may operate outside the investment purvey of many Stockhead readers, analysing their financial results is still a good way to gain insights about the financial services sector, which itself is a key component of the broader economy.

Three of the big four — Westpac, NAB and ANZ — reported full-year earnings to the end of September over the past week, and it wasn’t pretty. Both Westpac and NAB reported double-digit declines in net profit, while all three banks cut their dividends.

In its summary of bank reporting season, consulting firm EY said the falls were driven by tighter net interest margins and softer credit growth, coinciding with this year’s slowdown in Australian GDP.

Across all four major banks (including CBA), cash earnings fell to $26.9 billion (down 7.8 per cent), while APRA’s ongoing enforcement of bank capital requirements saw total return on equity fall by 1.25 per cent.

Coming off a horror year with the Royal Commission, Australia’s banks are working to regain the trust of consumers.

But looking ahead, EY said the new market dynamics meant the banks faced ongoing threats to the market oligopoly they currently enjoyed.

Instead, the new paradigm is creating an ecosystem where “incumbents are being challenged by new digital-only banks, payment service providers and technology firms”.

Among those new competitors are the influx of neo-banks that are entering the market without legacy networks such as physical bank branches.

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And while the jury is still out in the investment community about the long-term prospects of buy now, pay later companies, it remains one of the hotter sectors on the ASX so far this year.

There’s also been a sharp rise in new fintech competitors operating across both consumer and business lending.

In addition, “with the fast-approaching introduction of open banking, the future will usher in changes that will fundamentally shift the landscape and business models of financial services firms”.

All of that, along with a “seismic shift in consumer preferences, economic trends and regulations”, mean Australia’s big banks “have tough choices ahead to determine how they stay relevant”, EY said.

And the analysts added that those changes also provide a good opportunity for the sector to “fundamentally reframe itself”.

In turn, they said the companies that provided a broader service — centred around financial health and personalised value propositions — would gain the upper hand in the new operating environment.