Ghanapolitics: ABC News/Ian Verrender: Open Banking … the revolution that could break the banks

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ANALYSIS

By business editor Ian Verrender

Posted about 4 hours ago

Australia's big four bank logos: Commonwealth, National, ANZ, and Westpac.

PHOTO: Open Banking could make life tough for the big banks in the long run. (ABC News: Alistair Kroie)

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 (delivered with a broad smile that could only be a result of the prospect of a dreamy commission) 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.

What are the risks of open banking?

Open banking could benefit consumers, but there may also be privacy risks, say critics of the new Consumer Data Rights legislation.

While that's terrific news for consumers, it has sent bank executives into a cold sweat. And it should be a wake-up call for investors, many of whom — including super funds — have plunged their savings into bank shares for strong reliable dividends.

For 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

When Reserve Bank boss Philip Lowe delivers his much-anticipated rate cuteither tomorrow or next month, he'll be once again putting a squeeze on bank earnings.

With a cash rate at 0.75 per cent, the Reserve Bank is fast running out of conventional policy to spur the economy and weaken the Aussie dollar.

Australia joins low rate club

With the cash rate down to a fresh low of 1 per cent, Australia has entered what's been dubbed the "era of irrationality, impotence and inequality".

But there is no way the major banks can afford to pass on the 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, a large chunk of savings rates have hit the zero barrier.

According to Credit Suisse analysts, around a 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's been similar moves with power companies, particularly in the UK, 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.

Next 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.

This is how Macquarie analysts see the changes. 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.

INFOGRAPHIC: Macquarie analysts' modelling of how the average bank customer might change. Source: Macquarie Research

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 reckons our banks are charging between 10 and 20 times — yep, that's correct — 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.

In recent years our banks have begun using loyal, long-term customers to subsidise new customers by offering discounts on new home loans. Once it becomes easier to switch, that kind of discrimination will be more difficult.

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, which called for an immediate end to the rapacious behaviour rampant throughout the sector.

Not surprisingly, there has been a concerted push back against many of those changes, particularly the clampdown on lending standards that were designed to stamp out irresponsible and, in extreme cases, predatory lending.

The shocking revelations about wholesale theft in superannuation and insurance, including charging fees from dead clients, has 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.

Topics: banking, industry,business-economics-and-finance, australia

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Ghanapolitics

Monday, 30 September 2019

ABC News/Ian Verrender: Open Banking … the revolution that could break the banks

What are the risks of open banking?

The cash rate crunch

Australia joins low rate club

Prepare for open banking

Can the banks stave off the inevitable?

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FEATURES

Drone pilots experience 'moral injury'

Why BFF break-ups can be worse than relationship endings

Communist China at 70

Breaking the silence on postpartum rage

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