The royal commission - the country's top form of public inquiry - will investigate alleged and established misconduct in the sector.
Australia's banks, which are among the most profitable in the world, have been accused of customer exploitation and corporate fraud among other scandals.
The inquiry held its first hearing in Melbourne on Monday.
Commissioner Kenneth Hayne said the inquiry would examine misleading and deceptive behaviour in the industry and conduct which fell "below community standards and expectations".
He said while Australia had "one of the strongest and most stable" financial service sectors in the world, there had been many established examples of misconduct, raising questions about cultural and governance practices.
Along with banking, the inquiry will look at superannuation - or pension contributions - insurance and wealth management industries.
However the focus is expected to be on the major lenders, which have been accused of putting profits ahead of customers.
The first round of public hearings, to begin next month, will focus on inappropriate lending practices across mortgages, credit cards and car loans.
The inquiry will have the power to examine documents and compel witnesses to appear before hearings. It also has the ability to recommend criminal prosecutions and legislative changes.
Last year the Australian government said the royal commission was a "regrettable but necessary" action to restore public trust in the system.
"The only way we can give all Australians a greater degree of assurance is a royal commission into misconduct into the financial services industry," Prime Minister Malcolm Turnbull said.
The financial services sector is the largest contributor to the Australian economy, accounting for 9% of its value.