Techfin and the technology battle of the banks
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It wasn’t long ago that I remember heading in to the local shopping centre, with my pocket brimming at the seams, trying to contain the clunky cheque book I would be needing in a few short moments. This process was made all the more exciting by the fact I had placed an item on lay-by, securing it weeks earlier, and finally heading in to pay off the final instalment.What a world of difference we find ourselves in today.
Within the last decade, the way we shop and consume via the internet and through digital means has rapidly evolved and led to efficiency and productivity gains across the board. My cheque book and to an extent wallet have now been replaced by a few numbers on my credit card that occupy my online profiles, while lay-by has now been usurped by exciting start-ups like Paypal and Afterpay, allowing me to purchase goods instantaneously, while paying later.
Tools for our digital consumption have never been more powerful, or effortless. With a few clicks, anyone can set up a bank account online, transition effortlessly across to a travel website, book a holiday to the other side of the world, and finish it all off with purchasing and sending the relevant travel book to your phone, tablet and computer simultaneously. We are beginning to see this digitalisation of our lives leading to change and innovation across many industries.
One sector that has dragged its feet into this brave new world are our banks. How are we able to have self-driving cars and Artificial Intelligence teetering on on the cusp of mass release in 2017, yet sending $100 to my brother’s bank account on a Friday afternoon would mean a wait of up to four days for full clearance? Thankfully the Reserve Bank of Australia compellingly pushed our banks to rectify this sort of unnecessary transaction lag across the sector last year, with their PayID initiative.
There has been a lot discussed in recent years about Fintech, the bright and bubbly new entrants to the market, intending to disrupt the big entrenched players and offer new and exciting financial services at the expense of the banks. However, Fintech companies have proved to be more niche players than truly global disrupters, with banks either gobbling them up or incubating their growth from the start.
What I am truly excited about is what terrifies the banks themselves, Techfin. Consultancy firms around the world have begun ringing the alarm bells for the big banks, and this is welcomed news for consumers. Firms such as Apple, Amazon, Google, and Facebook, have begun the transition towards becoming all things to all people. An example of this evolution can be seen in the first three company’s incredible pursuit to conquer our home through smart technology, while Facebook seeks to capture our entire online social lives through messaging (Whattsapp, Messenger), photo sharing (Instagram), and gaming (OculusRift). The next frontier? Payments and financial services. These tech giants, along with the rapid expansion of what we connect to the internet, is leading to what experts’ term as the four horseman of the e-pocalypse. Disintermediation, Unbundling, Commoditization, and Invisibility.
The first stage will see banks losing access to customers as they turn to non-banking channels which allow consumers to borrow money online without ever needing a bank itself. Amazon has just allowed small loans in the US, while the two Chinese messaging behemoths, WeChat and Alipay have allowed forms of peer-to-peer lending and loans for some time now. The second phase involves services becoming unbundled and consumers beginning to selectively choose their products (e.g. interest-bearing accounts), while payments also experience an unbundling effect from consumers’ traditional banking structures, allowing the leveraging of third-party payment solutions.
Thirdly, as these two stages snowball, banks have and will struggle to differentiate themselves as consumers gain greater access to transparent online data, allowing for them to shop around. Lastly, with all of these market forces hammering the banks, their brand awareness will decrease with consumers more focused on the better deal than the reliable institution. A recent poll conducted in the US found 73% of millennials say they would be more animated about a financial service from Google, Amazon, or Paypal, than their current bank, while roughly one in three say they don’t need a bank at all. This is truly a turning point in our society. As any parent can tell you, once the kids get hold of something they trust and like, it’s hard to change course.
This isn’t hyperbolic conjecture about a potential future either. In Japan, Rakuten, one of their largest online retail marketplaces, operates the nation’s largest online travel portal and messaging app, with 100’s of millions of users. The messaging app, based off recent chats, offers shopping item suggestions, while the company issues mortgages, securities services, and credit cards through the same portal.
This amalgamation of services is all driven by data, and the power it provides to offer tailored services. At the moment, the banks still reign supreme here. Years of compiling financial data and feeding it into complex algorithms have them firmly at the top, however the tech giants are coming. Why did the Big Four banks in Australia act with such brazenness and ask APRA to form a cartel (blatant anticompetitive behaviour) in negotiations with Apple over its technology Apple Pay and its mobile wallet? Well the answer lies in market share and margins. Australia is the 7th most cashless society in the world, 90% of our purchases in 2018 were contactless, and according to the commonwealth Bank, the number of their customers reaching for their smartphones to make a payment reached 16.8 million in the six months to June 2018 (an increase of 35% from the prior year).
All this is to say, we are a big and exciting payments market, with some estimates putting the market for merchant-fees at roughly $A2.5bn. Mobile payments and online wallets are the future, and we can be sure that a majority of Australians will be connecting over the next few years. It is no wonder then that the Big Four were unwilling to give up even a skerrick of their merchant fee slice to apple (which some analysts believe was asking for .15 cents per dollar).
We can all breathe a sigh of relief though, as it now seems that technology, and competition has won out, with ANZ and CBA having caved in, leaving NAB and Westpac with no real choice but to follow. All this is to say, Australia’s financial services market is rapidly changing, and we may find ourselves applying for credit services and making payments through our family WhatsApp group or the work Slack channel in the next few years. With the stranglehold the banks have had over the lending market, and the rise of non-bank lenders leading to shaky deals and increased scrutiny by APRA, I am excited about the potential for these big tech players to shake up the playing field and offer truly revolutionary forms of financial services. I’ll be happily waiting to apply for my next construction loan via iCloud.
David Tricarico is a director of Adepto Co and the author of davidtricarico.com.au