As we recover from cabin fever and the region starts opening up, it’s clear that the accelerated shift to digital banking is here to stay.
It’s been a while since my last update so here are 5 topics that caught my eye, reflecting how the banking industry is rapidly evolving across Australia.
1. A NEW WAY TO PAY BILLS IN THE FUTURE
In its submission to the Inquiry into the Future Directions for the Consumer Data Right, NPP Australia has highlighted its upcoming Mandated Payments Service (MPS), enabling third parties to draw payments directly from customer bank accounts.
Among the benefits for customers will be the ability to conveniently settle bills from utilities and other providers without incurring credit card fees. The service will also decrease inertia that keeps many consumers from changing banks due to direct debit arrangements on their accounts, since mandates will be portable between institutions. To ease the learning curve for consumers, NPP intends to align the customer experience closely to the CDR UX guidelines, especially for consent management.
The current deadline for banks to support the technical and operational requirements is 3 Dec 2021, although given the time taken for Osko to be widely supported in web and mobile banking, Direct Debits may be with us for some time yet
2. REGULATORS RESPONDING TO THE CRISIS
In April, APRA pressed pause on issuing new banking licenses, noting that “it is challenging for new entrants to succeed even under normal economic conditions, which is why APRA does not consider it prudent to license APRA-regulated entities at this time”. Among aspiring new banks, the reaction seems to be mostly positive as they continue work preparing their propositions.
Also noting the exceptional conditions, the ACCC granted 3-month open banking exemptions for banks required to share product reference data by 1 July 2020, on the basis that resources had been justifiably diverted to deal with the crisis.
Both regulators are likely to maintain a focus on these initiatives to drive competition. As highlighted by the ‘Fintech & Digital Banking 2025 (Asia Pacific)’ report, 80% of banking assets in Australia are still expected to be dominated by the Big 4 by 2025. Small and mid-tier banks will be challenged by a combination of legacy systems, lack of digital talent, and lack of experience in executing large-scale digital transformation.
3. BIGTECHS CONTINUE TO INNOVATE AROUND FINANCIAL SERVICES
Last month, Google launched a lending solution specifically for US institutions struggling with the volume of government backed SME loan applications. The launch showcases Google’s capabilities at data extraction and analytics at a time when many banks are investing in improvements to their credit origination.
The launch follows reports that Google is working on a debit card, with speculation that in addition to enabling new revenue streams, visibility into payments via the card might enhance sales attribution for its advertising products. Some see these as further steps towards Google’s inevitable entry into mainstream financial services. Others believe Google will continue to partner with FIs as a technology provider and distributor rather than compete for the primary banking business.
Also in the credit space, WeChat is developing an alternative credit rating system for its users. The rating service may be offered to other organizations including banks.
Shopify, meanwhile, announced its alternative to traditional merchant accounts. Named “Balance”, it comes with a debit card, cashback rewards and other benefits for merchants. Shopify is also entering the payments space, with a Buy Now Pay Later service that merchants can offer their customers.
4. HOME LOAN COMPETITION LIKELY TO INTENSIFY WITH OPEN BANKING TRANSPARENCY
The ACCC released an interim report from its enquiry into pricing of home loans by the major banks. Among the interim findings is a lack of transparency in rates. Gaps between headline interest rates and average rates paid by borrowers were around 130bps due to substantial discretionary discounts, typically offered after application assessment.
Product Reference Data shared by banks under the initial Open Banking release doesn’t improve transparency around discretionary discounts. The opening up of Consumer Data starting from July 1 however, will reveal specific rates consumers are paying on their loans. While mortgage brokers have had visibility into the actual rates being negotiated for their clients, the potential for other accredited Data Recipients to also observe actual rates should increase awareness and empower consumers to find and negotiate better deals.
5. ACCELERATED ADOPTION OF DIGITAL BANKING
The pandemic continues to accelerate the shift to digital banking. McKinsey reported a 20% increase in digital engagement from consumers in Europe, with between 20% and 40% of customers interested in financial products to help them through the crisis.
While a marked shift to digital banking seems likely to favor challengers, there are some mixed signals. In the US, Chime reported record account openings, likely related to its initiative to help customer access stimulus checks faster. In Europe however, customer growth rates for challengers seem to have slowed during the crisis.
Neobanks relying heavily on fresh investor funds have additional challenges including Monzo, reported to be closing a substantial down round. Locally, Volt delayed a funding round for overseas investors and deferred IPO plans. The subdued outlook for credit will increase the difficulty for neobanks seeking to progress to a more sustainable basis via lending.
In line with the shift to digital banking, the Fintech and Digital Banking 2025 – Asia Pacific report also highlighted that more than 60% of APAC customers are willing to switch to neobanks or new digital challengers by 2025. However, all participants in the race to be digital-first will need to focus even more on being customer-driven and platform-oriented. Ultimately, they must unleash the potential of personalization at scale in the digital-first story.
ABOUT THE AUTHOR
Dr. Malcolm Macnaughtan is Regional Director for Australia and New Zealand at award-winning fintech software provider, Backbase.
He oversees Backbase’s sales and go-to-market success for his territory in Asia Pacific. With an extensive background in technology development and commercialisation, Malcolm helps financial institutions transform their digital channels to get in shape for an increasingly competitive digital and open banking future. He has worked with banks, accounting and advisory firms to apply digital technology to serve their customers more effectively and profitably.
Prior to this, Malcolm’s experience spans diverse roles including start-up co-founder, R&D, product management, and sales leadership.
An engineer by training, Malcolm has a PhD in wireless signal processing and is first named inventor on a number of international patents
Interviews with banking leaders co-published in association with RFi Group’s AB+F magazine:
Alex Twigg, CEO, Judo Bank
Melos Sulicich, CEO, MyState Bank
Paul Lewis, CEO, Credit Union Australia
Peter Lock, CEO, Heritage Bank
Scott Morgan, CEO, Greater Bank
Steve James, CEO, Teachers Mutual Bank
Steve Weston, CEO, Volt Bank
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