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Australia has a mixed economy that provides its citizens one of the highest wealth-to-citizen ratios in the world. This article will cover the truly unique financial system that Australia utilizes, as well as a range of market information covering currency, futures, and stocks.
The financial system in Australia is comprised of agreements covering the transfer of ownership of financial claims, as well as lending and/or borrowing funds. The major players in these various financial markets are:
While this industry is dominated by the larger banks, which will be discussed shortly; it is important to note that the smaller institutions together make up a dominant force in the marketplace.show more
The Australian banking industry is pillared by 4 main oligopolies of the finance sector. They are:
While there are many more banks (and credit unions) throughout Australia, smaller financial institutions are less significant than the “big four” and do not weigh as heavily when it comes to lobbying industry standards. Additionally, there are some large international banks that are present in Australia, but most are not available to the retail consumer. The Reserve Bank of Australia (RBA) is the central bank of Australia and is arguably the most trustworthy institution in Australia’s financial sector. Interestingly, the Australian government secures deposits against banking failure as long as they do not exceed A$250,000.
There are three smaller divisions within Australia’s insurance market, including:
While most major corporations in this market focus on a single insurable category, several corporations have recently started branching out and offering combination insurance for consumers. These insurance companies have been forced to rethink their marketplace strategies due to competition from major banks as well as foreign financial conglomerates who are attempting to take control of the Australian insurance market.
Superannuation is an organisational pension program created by a company for the benefit of its employees. Also referred to as company pension plans, these arrangements can be provided by banks or insurance companies, but independent of who they are funded by, these funds are very strongly regulated by the Australian government. Superannuation funds are uniquely beneficial due to an increased percentage of return and tax free (or reduced) implications.
The main stock exchange operators in the Australian financial market are the Australian Securities Exchange (ASX) and the smaller National Stock Exchange of Australia (NSX). Both exchanges provide stock exchange facilities for Australian listed securities. NSX acquired the Bendigo Stock Exchange in June 2012 and subsequently merged its operations.
The derivatives (or futures) market, while traded on the ASX is a somewhat popular choice for institutions as it offers cost effective exposure as well as limited protection against short term market movements. The most popular of these indices is ASX SPI 200.
Most foreign exchange transactions (forex for short) are also heavily regulated, although the RBA has largely delegated its control to authorised market brokerages and forex dealers.
Australia is a leading country in the quantity of permissible payment systems. Payments from most categories are monitored and regulated by the Australian Payments Clearing Association (APCA).
Australia’s legal tender is called the Australian dollar (AUD$), or sometimes “The Aussie Dollar”. Cash payments are settled and regulated by the aforementioned APCA.
Cheques are very important among non-cash payment instruments in the Australian financial system by transferred value. Although recently, cheque usage in Australia has been on a sharp decline; this follows a worldwide pattern of reduced monthly cheque transactions. However, it is worth noting that this decline is faster in Australia than most other countries.
Cheques and traveller’s cheques are also settled in accordance with procedures and regulations set by AusPayNet, a self-regulatory body in Australia that handles such transactions.
Direct entry is the name of the electronic payment system used to transfer funds electronically between Australian bank accounts. Regulation is overseen by the APCA, which handles clearing and settling of transactions.
Direct entry uses a dual verification process to verify bank accounts which debit and credit funds electronically and is generally accepted as the most secure and convenient for Australian citizens.
Electronic Fund Transfer Point of Sale (EFTPOS) and some Automatic Teller Machine (ATM) transactions occur over the EFT network. This system is similar to the ‘TAP & Pay’ system that is more prominent in the American financial market. EFTPOS provides secure and incredibly fast electronic communications with corresponding bank accounts for verification within a matter of seconds. EFTPOS transactions are regulated by the APCA.
Major credit companies dominate the credit card system in Australia. Most vendors accept MasterCard, VISA, American Express, and Diners Club.
As quoted on their company website, BPAY is a “fast, convenient and easy way to pay bills”. Offered through Australia’s leading financial institutions and accepted by more than 45,000 billers, BPAY makes it easier for users to pay bills and transfer funds through online banking.
The four major banks of Australia regulate the BPAY system, as opposed to the APCA, and covers over 150 Australian banks and other financial institutions. BPAY is accepted by over 45,000 Australian businesses and deals with a volume of more than A$24 million dollars.1
Known prior to December 2006 as the Australian Stock Exchange, the Australian Securities Exchange (ASX) is a world-class financial market exchange that offers an extensive range of services including trading, initial public offerings (IPOs), company listings, and clearings across a strong range of different asset classes.
While the ASX is the second smallest stock exchange of the global top 5, it is ranked globally and leads the Australasian region with a total market capitalization of approximately A$1.5 trillion dollars.2 ASX also offers some of the most cutting-edge technology in the financial marketplace and also has an extremely competitive derivatives market which encompasses A$47 trillion dollars.2
Uniquely positioned as the world’s first financial market to open each day, the ASX is the only financial exchange that truly sets the pace for the markets each day followed by the Tokyo Stock Exchange (TSE).
The ASX is one of the most strongly regulated among competing exchanges as Australia has some of the strictest regulations for financial exchanges worldwide. The less popular NSX is somewhat less regulated as it controls significantly less in market capitalisation at approximately A$5 billion.
ASX has over 150 years of financial experience and boasts a team of 530 people. They are highly reviewed by their customer base and experience a high satisfaction rate based on their highly responsive customer support team and extensive trader friendly options.
The Australian dollar (AUD), also referred as the “Aussie” for short, is the centralised currency of Australia, its external territories (Christmas, Keeling, and Norfolk Islands), as well as nearby independent nations such as Papua New Guinea and Vanuatu, whom are economically reliant on the Commonwealth giant.
The Australian dollar is the world’s 5th most traded currency. It is symbolised with the standard dollar sign $, AU$, or sometimes A$ for short, and can be further divided into 100 cents. Roughly accounting for 7% of the world’s daily share of currency trades, it is exchanged in markets against the neighbouring Japanese yen (JPY), British Pound (GBP), US Dollar (USD), and the euro (EUR).
The “Aussie” is regarded as a safe-haven currency as Australia enjoys strong regulation and a stable political and economic environment. This currency also benefits from relatively high interest rates, meaning traders can enjoy the benefit of earning swap fees while accepting lower levels of volatility. The AUD is also a popular choice because of its stability, in stark contrast with the greater Australasian region of historically tumultuous and generally smaller economies.
While the ASX offers exposure to roughly 2,200 companies, it does not allow much room for diversity. Australia’s economy is mainly dependent on its services sector and despite its lack of multiplicity. While regarded as a safe-haven for capital, investors can only diversify their portfolio to a certain extent.
While the services (or tertiary) sector dominates the market, the industrial sector is also worth noting. Manufacturing, mining, ship building, and agriculture also supplement the economic landscape. Although relatively small on a global scale, Australia also has a rapidly growing technology and aviation sector. The companies listed for these two sectors are strongly regulated and recent falls in other global powers such as GE for example, has made room for innovative new companies to grow at a rapid pace. As such, Australian stocks have become a popular choice for risk-averse investors who seek companies with growth potential.
1: What is BPay (2018). Retrieved from https://www.bpay.com.au/Personal/Overview.aspx, on July 5, 2018.
2: Corporate Overview (2018). Retrieved from https://www.asx.com.au/about/corporate-overview.htm, on July 5, 2018.