Banks brace for tornado of disruption

Australia’s banks are the most profitable on Earth, five times more profitable than Britain’s and 12 times more than German banks, a new report from BIS revealed this week. On average, every adult Australian will hand over $1,600 in profit to the big four banks this year.

More give, less take is NAB’s ironic slogan. Its ad campaign leads us to believe that NAB is different to other banks – more of the good stuff like Dorothy from The Wizard of Oz and less of the bad stuff like the Wicked Witch of the West. Unfortunately evidence would suggest that, like the Great and Powerful Oz, these claims are mostly smoke and mirrors.

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Fortunately for consumers, as Seek founder Paul Bassat told the recent Australian Financial Review and Macquarie Future Forum in Sydney, the big banks’ super profits are now under threat from a new wave of technology disrupters who refuse to take the customer for granted.

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.

The headline variable comparison rate on a $500,000 loan from NAB is 5.41%. That’s more than double the current cash rate of 2.50% and helps to sustain a shareholder-pleasing net interest margin (the price of loans less the cost of borrowings) of 2.02%.

The BIS study into bank profits follows similar reports from the Grattan Institute and Treasury that uncovered that Australians are paying $10 billion too much or twice what they should in superannuation fees each year. A study by Stockspot last year found that 45% of bank-platform managed fund returns were paid away in fees over the five years to 2013.

All of these statistics point to a fair amount more take than give.

That is, unless NAB was referring to the $4.5 billion it plans to give back to shareholders this year in the form of dividends.

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Shareholders certainly value the protected and profitable position afforded to the big four in Australia. Last year UBS Analyst Jonathan Mott described CBA as “the most expensive bank in the world by almost every measure”.

Since then the CBA share price has risen further and the bank now trades at 3.6x tangible book value. In 2012, Australian banks became larger than the entire banking sector of Europe. The four banks that support Australia’s 1.7% share of the world economy now dwarf the entire European banking sector that fund 30.2% of global GDP.

Recently the Australian government made its position clear on bank profitability when it wound back the FoFA consumer protection laws in favour of the big four’s bottom lines. The result of the changes are that the bank’s financial advisors are still not required to recommend the best financial products to their clients, and instead can pedal the banks’ overpriced investment funds. Since the four pillars control 80% of the wealth management messaging, consumers continue to be misinformed when it comes to choosing between complex financial products.

AFR Smart Investor showed how Australia’s two largest wealth managers are effectively ‘hugging’ the S&P ASX/300 index while charging active equity manager fees. Would Australians be investing their billions with these managers if they understood that similar returns could be achieved for a fraction of the cost via listed Exchange Traded Funds (ETFs)?

 

Would advisers still be promoting these high-cost bank products if there were no incentives to do so?

 

Meanwhile the Commonwealth Bank Financial Planning scandal shows that the regulator is asleep at the wheel when it comes to protecting consumers from the banks’ unscrupulous tactics to boost shareholder returns at any cost.

Thankfully there’s another force beginning to change the banking landscape around the world. It’s one that the banks have little influence over and could potentially save Australians billions.

Financial tech disruptors are coming to eat the big banks’ lunch. The seeds have already been planted in financial advice, lending and online investing.

Two Stanford grads recently launched the first online share trading app that doesn’t charge any commissions. That’s right, zero brokerage. Unlike their US competitors, robinhood.com doesn’t have any major administrative expenses; they have no plans to open a bricks and mortar branch or launch any national marketing campaign. This is the future of online trading.

NAB could have launched something like this last year if it really wanted to disrupt online broking in Australia. Instead it revealed a suspiciously similar looking platform to its counterparts born in the 1990s, CommSec, E*Trade and Westpac Broking. Australians can now choose between the Wicked Witch of the North, South, East or West when divvying up their $29.95 share trades. Bell Direct offers one of the few non-bank alternatives at $25.*

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. Given 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 in March this year.

Superannuation, wealth management and financial advice are the next areas ripe for disruption. Fees are extortionately high by global standards and consumers are fed up with the lack of transparency and bank conflicts of interest. Instead of a bank employee, your next financial advisor will most likely be an algorithm that can match you to the best and most suitable products at the lowest possible cost. Stockspot is the first of that new breed.

While the banks have been focusing their resources on extinguishing FoFA to protect their distribution model and profit pool, a bigger competitive threat has snuck up unnoticed. It won’t be legislation, regulation or banker-led inquiries that drive change in the Australian banking landscape.

Technology disruptors have begun to tear through the big four like a tornado, uprooting their gold-paved roads while delivering Australians better financial choice and improved investment outcomes. Like the Great and Powerful Oz, the banks may be left wondering what happened to their smoke and mirrors when the storm of disruption passes.

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Chris Brycki

Stockspot Founder and CEO

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