There is something brewing in the banking landscape that has been rumbling for some time, but only now has it caught the attention of many trying to understand the impact of it all on the traditional four pillar model.
Open banking, which commenced its phased release from July 2019, was borne from the implementation of the ‘Consumer Data Right’ (CDR) that was recommended by the Productivity Commission back in May 2017. The CDR means Australians can authorise data specifically about them to be made available to other businesses.
The banking sector will be one of the first examples of the legislated CDR and has led to a proliferation of new businesses ready to seize on the opportunity legislation has delivered it.
The traditional bank model in Australia is arguably ripe for disruption and not for the first time. We have seen credit unions, building societies, foreign and smaller retail banks try and fail to gain much traction over the years. Some see the game changer now as being the opening of previously lockjaw regimes that had set tight restrictions on the sharing of customer information.
This change in regulation is resulting in a landgrab amongst dynamic start-ups who are now armed with an open information platform and a legislated mandate from the government to shake things up. They are targeting customers with a more interactive, intuitive and transparent online experience. They are championing the fact that, increasingly, following the royal commission, many traditional banks fail the trust test. Therefore they believe the need for alternative and independent options are required.
Called neobanks for their lack of branches, zero legacy systems and total digital only presence, we have seen a number apply to APRA for full banking licences. Two of which, 86400 and Xinja, launched transaction accounts last week, with a third Volt gearing up to launch shortly. All hoping to capitalise on this new dawn of banking.
But what does this mean for existing holders of the banks? Especially those Income seeking investors who continue to hold onto them for their above-market dividend yield. Does this new emerging force place the traditional bank model at high risk?
What is apparent is that the product offering is targeting millennials as a primary focus. While the bells and whistles of mobile apps, high introductory interest rates and low costs may bring them on board to start with, the endgame will be to gaining market share in the lucrative $1.7 trillion* home loan market.
This is possibly the biggest threat posed to the existing institutions, since Millennials make up a significant amount of new home loan applications.
Disruption in the home loan market has been observed in the past. Readers may remember the emergence of companies like Wizard Home Loans and Aussie Home Loans who in the early 2000’s shook the industry to its core, forcing the traditional institutions to engage in more competitive and consumer friendly based practices. But when funding costs rose, and the onset of the GFC froze money markets, with no broader business to lean on, they struggled to remain relevant. After a period operating as stand-alone mortgage brokers, many were soon gone, gobbled up in either acquisitions or left to peter out.
And herein lies the main question. Will individuals trust these new start-up neobanks above the venerable long-serving stable institutions to manage their life savings, and mortgage obligations particularly if things get tough in financial markets?
It is said that Millennials possess a healthy cynicism that holds everyone in doubt. A recent Royal Commission highlighting bad practices amongst traditional institutions will likely help neobanks client acquisition within the target demographic. Further, armed with the government-funded $250,000 ADI guarantee many will give neos a go.
There is low hanging fruit to be had in the target market. Whether it will ever be enough to shake more out of the broader tree, time will have to be the judge of that.
To that end, banks will not be sitting on their hands doing nothing. They are keen to retain their client base and understand emerging threats. Examples include the Commonwealth Bank, who is investing $5 billion over five years to deliver a more interactive experience for its 5 million daily logins. The Bendigo and Adelaide Bank who not only recently launched ‘Up’ its digital bank offering, also has an indirect holding in 86400 through its interest in CuscalIt is likely that that there will be more news of traditional bank involvement as time moves on.
So what should investors do now?
Don’t act hastily. All businesses have competitors. Some successfully operate with them, and competition can make businesses better in the long run. The initially limited offerings of neobanks are targeted in specific products and demographics, so it will take time to make an impression on the market.
In that time, we will have had the chance to analyse the numbers and see the actual real impact with the emergence of these new players. Rest assured, should there be a risk to future dividends of the Banks, then those pressures will appear in the numbers, and investors can then make an informed decision based on the facts.