A couple of quick banking quiz questions if I may…
Which country has the most profitable banks in the developed world? US? Germany? No, it’s Australia
Which banks spend the most on technology and innovation? Australian banks…
Notice a trend?
The pre-tax earnings of Australia’s major banks, as a share of their total assets, rose to 1.28 per cent last year, the highest of any developed market.
Australia’s banks are five times more profitable than Britain’s and 12 times more than German banks. Fueled by $300 million in revenue, every adult Australian will hand $1600 in profit to the big four banks resulting in combined profits of $29.7 billion this year.
The Australian banks are so good that regulators have had to announce a review into competition.
So why are Australian banks so good? Whilst there are a variety of factors, including a favourable resistance to the Global Financial Crisis that impacted a number of countries and currencies a few years ago, one of the key reasons is innovation and technology investment.
Speak to any Senior Australian banker and they get it. They understand that change is coming and not only are they doing something about it, they are doing it now. Newspapers, music and publishing have all seen the effects of change and Australian bankers are not waiting. While barriers to entry are higher for banking, especially regarding deposit taking, Australian banks are not resting on their laurels.
Australian banks have already grasped, that being the bank that powers business, means not only income from payments, but access to consumer data. The end game for Australian banks is getting a customer using a bank’s mobile app, to tap and pay on the retailers point of sale system provided by the bank. They reason that end-to-end control of this ecosystem will protect them from a raft of new competitors.
The news for UK banks is to start moving now. There is no doubt that Australian banks are more efficient, more profitable and also have more innovative technology, most of the banks have, or are undergoing large scale core banking upgrades. There is evidence that UK banks are opening their eyes. There has been a large number of recent appointments to senior UK banking roles being filled by ex-Australian based bankers.
Australian investors are also enamoured with technology. If it’s not happening in the UK yet it will happen soon. More and more analyst questions will be focused on technology investment. Plenty of time will be allocated in investor updates and annual reports to discuss technology innovation. Only Barclays can claim to give technology any semblance of the coverage an Australian bank would give at an investor briefing.
The reason for all this investment and focus is the potential of financial tech disruptors coming to eat the big banks’ lunch. The seeds have been planted in payments, financial advice, lending and online investing with younger customers already looking for alternatives. Superannuation, wealth management and financial advice are the next areas ripe for disruption.
SocietyOne is Australia’s first peer-to-peer lender that matches borrowers and lenders through web-based technology to offer more attractive interest rates than banks. As Australian banks have $2 billion in annual profit to defend in personal lending it should come as little surprise that Westpac emerged as a major shareholder of SocietyOne.
The challenge comes as banks are increasingly looking at Facebook, Apple, Google and Amazon.com as potential rivals. Facebook has reportedly applied for an e-money licence in Ireland, which would enable it to issue its own currency and compete in the lucrative global remittances industry. Companies such as PayPal, MYOB and Square, have become likely rivals. Each offers ways for businesses such as cafes to take credit cards and payments using smartphones and tablets.
Due to this, a new round of start ups are emerging focused soley on taking a share of the very large banking pie. In the US this trend is several years ahead of Australia but make no mistake, the financial disrupters have global ambitions. Companies such as Braintree, Prosper, Lending Club, PayPal, Square and dozens more are successfully disintermediating the banks. From payments to peer-to-peer lending, there are millions, or even billions of reasons why a tech invasion is unavoidable.
For now the Australian banks can sit smugly, knowing that the tough decisions they have already made, have put them in a stronger position than most to fight off the threat of new competitors.