Ian Verrender* says that almost every service provided by Australia’s big banks is likely to be targeted by new players, which will be a boon for customers but not for the banks.
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Ever paid a hotel bill overseas with an Australian credit card and later been gobsmacked by the fees gouged from your bank account?
Perhaps you’ve transferred money offshore to a relative and, after being forced to hand over a large percentage of the total, wondered whether you’d just been waylaid by a band of pirates?
Or maybe, after voicing your displeasure at the above-mentioned atrocities, you’ve been convinced you should use a travel card next time because there are no fees involved?
Except, you’ve later discovered that, instead of fees, your bank has just fleeced you with an exchange rate that would make Blackbeard blush.
Then take heart because all this is about to come to an end as a raft of new, low-cost competitors are preparing to cut the banks’ lunch and eat into the enormous profits they’ve been generating from overcharging in just about every segment they can.
Foreign exchange isn’t the only area of bank income about to come under attack.
Almost every conceivable service provided by our banks is likely to be targeted by new players, aided by regulatory changes that will deliver the ownership of your data into your hands.
That’s very likely to hit Australian bank profits, especially as millennials, with less allegiance to financial institutions and greater tech awareness, replace boomers in the workforce.
In addition to the new wave of technology sweeping through banking, our descent into ultra-radical monetary policy is likely to further constrain revenue and profits.
Investors and employees are likely to be affected as bank dividends are cut and institutions lay off workers.
As those banking pillars begin to shake and crumble, little wonder the pressure is rising to push back against reforms from the Hayne Royal Commission into Banking Misconduct.
But there is a more immediate earnings threat.
The cash rate crunch
With the cash rate dropping, the Reserve Bank of Australia (RBA) is fast running out of conventional policy to spur the economy and weaken the Aussie dollar.
But there is no way the major banks can afford to pass on any cut in full.
And the closer official rates get to zero, the more they will struggle.
Finance may seem complex, but it’s not.
Banks operate like any other middleman.
Instead of apples or hardware, they deal in money.
They buy at a low price (interest rate) and lend at a higher price.
The difference is their profit margin.
Long ago they figured they didn’t have to pay much for a large portion of deposits.
Savings accounts — where most salaries end up every fortnight — pay very little if any interest and most of us have been happy to accept that for the convenience.
But as rates have plummeted, returns from investment accounts and term deposits have been pushed lower, and a large chunk of savings rates have hit the zero barrier.
According to Credit Suisse analysts, around one-quarter of all deposits now are delivering zero interest.
Another cut will take that to 35 per cent.
That might sound a terrific deal for the bank.
But what it means is that the bank can no longer lower those savings rates to balance a cut in lending rates.
The profit margin is squeezed.
UBS analysts reckon that over the next three years, ultra-low rates will reduce bank earnings by up to 8 per cent.
Prepare for open banking
Remember how difficult it once was to change phone companies?
You couldn’t take your number with you.
It meant having to reorganise all your contacts and starting all over again.
For good reason that’s no longer the case.
There have been similar moves with power companies, as customers have been given ownership of their data and the right to use it to secure a better deal.
The same changes are about to hit Australian banking.
It’s known as Open Banking.
And essentially, you’ll be able to switch your accounts with ease from one provider to the next and engage in a range of products and services from rival organisations.
In February, the big four banks will kick the process off, with other banks following in February 2021.
While it’s unlikely to pull the rug out from under the banks immediately, longer term it will make life tough for them.
New specialised companies and even large tech players like Google will be able to offer things like foreign exchange services, credit cards and mortgages.
Our reliance on one main institution will crumble, eventually providing basic transaction services that allow us to access specialised banking from a range of providers, many of them new entrants.
Australia is fertile ground for new players.
Credit card fees and interest rates are exorbitant, delivering huge returns to our banks.
And when it comes to foreign transactions, Macquarie Bank reckons our banks are charging between 10 and 20 times the fees now available from emerging new financial technology firms.
Mortgages, where our big four banks control around 80 per cent of the market, are also in the firing line.
Can the banks stave off the inevitable?
The threat to earnings comes hard on the heels of the damning report into bank misconduct by the Hayne Royal Commission.
Not surprisingly, there has been a concerted push back against many of its suggested changes, particularly the clampdown on lending standards that were designed to stamp out irresponsible and predatory lending.
The shocking revelations about wholesale theft in superannuation and insurance have seen many of the majors move to offload their funds management businesses.
The loss of those lucrative, if illegal, income streams has yet to fully affect earnings.
But the ongoing evolution in financial technology could well provide a much more potent revolution when it comes to our banking giants.
* Ian Verrender is the ABC’s Business Editor.
This article first appeared at www.abc.net.au.
