Mr Hartzer said the digital revolution reshaping the industry will only accelerate as more customers manage their finances with smart phones or online.

Banks are spending billions of dollars overhauling their IT systems as more customers conduct their banking digitally. But they are also facing competition from new sources, as technology firms and other businesses, such as supermarket chains, eye their hefty profits.

Mr Hartzer said Westpac was trying to "think and act like a 200-year old start-up company" as it faced rapidly changing customer demands.

"Disruption happens when businesses don't pay close enough attention to the needs of their customers,'' Mr Hartzer said in a speech to the Centre for Economic Development of Australia on Thursday.

''We also know that new business models are developing and they won't fit neatly inside out current operating model."

The comments highlight the long-term challenges facing Australia's big banks, which are tipped to make profits of more than $29 billion this year. As more people manage their finances online, banks concede they will face growing competition in core businesses such as payments services and lending.

Last month the co-founder of technology firm Atlassian, Mike Cannon-Brookes, described bank profitability as "insanity." He said companies including payments firm Tyro, where he is a director, where targeting the potentially lucrative market.

Mr Hartzer runs the Australian financial services division, which houses Westpac's flagship retail and business banks and accounts for more than half of the bank's profits. Banks needed to act as disruptors, he said, though he conceded they had not always done this well.

He cited the example of PayPal, which stepped into a market gap that appeared in the 1990s because banks failed to adapt credit card processes to the online world.

"PayPal was the disruptor - but only because the banks dropped the ball," Mr Hartzer said. "We can't make that mistake again. We have to be our own disruptors and make technology work for our customers."

He cited recent innovations such as the rise of contactless payments, and moves to allow customers to withdraw cash from ATMs with their smart phone. Westpac has also started a $50 million venture capital fund, Reinventure, which this year invested $5 million in peer-to-peer lender SocietyOne.

While start-ups are small and nimble operations, huge companies with tens of thousands of staff - such as banks - often find it harder to adapt to deep-seated changes such as new forms of technology.

Mr Hartzer said technological change was the biggest disruption facing banking since  deregulation in the 1980s, which ushered in an era of competition by allowing foreign banks to set up in Australia.