A dividend danger is clouding bank fortunes

Big banks will lose ground to newcomers if they don't adapt quickly to cloud computing. But demand for dividend payouts is in danger of confusing their priorities.

As interest rates fall, Australians are turning from bank deposits to bank shares to maintain their income. But Australian banks face a once-in-a-generation challenge that will require a major revamp of their operations. If they pay too much of their profits out in dividends during this crucial time they will risk lowering the value of their enterprises.

This was the conclusion I reached after a fascinating conversation with Ross Wainwright, global head of financial services at SAP. Australian banks along with all global banks invested vast sums in their own computer systems, which have become the heart of their operation.

But big chunks of those systems have now become outdated because far superior systems and services are available on the cloud. Effectively, instead of owning or leasing their own system organisations like banks can now access a global system and adapt it to their domestic needs. If carried out correctly computer costs are slashed but, of course, the cost of entry for rivals is reduced dramatically. Those banks that stay with high-cost legacy systems risk being overrun. But it’s not just the cost-banking that is about to be slashed – cloud computing can slash the costs of running government and a wide range of other enterprises.

SAP believes that the cloud will be as big a change to banks and financial services companies as the internet. In many ways banks are in a similar position to what newspapers faced 15 years ago. The newspapers did not want to cannibalise their highly profitable investment in print classifieds so were overtaken by newcomers who used the internet to divert the “rivers of gold” away from newspaper organisations like Fairfax (Companies are failing the online test, July 26).

Now that organisations can access the best international systems and do not have to develop their own, the cost of entry to banking and other financial services industries is slashed. Wainwright says big insurance companies whose profits are being hit by lower interest rates are looking hard at how they can take advantage of cloud computing to diversify their services.

That means that just as newcomers were able to set up in classified advertisements 15 years ago so newcomers can set up as banks, perhaps specialising in a small part of the market. In Australia they can use the government guarantee on deposits and operate with a far lower cost structure.

Yellow Brick Road is an early pioneer but many others can follow.

Banks have before them the example of newspapers and so must be early adapters but will not find it easy to adapt if they pay dividends that are too high.

Wainwright believes that the cloud will have transformed financial services within two or three years. SAP was one of the world’s largest providers of traditional computing systems. The German based company was in danger of being left behind and spent billions on acquisitions in North America to ride the new revolution. North America is leading the world and the German company, with 239,000 global customers, is using its American operation to spearhead the conversion. At this stage it has 6,000 companies in its global cloud network but believes that its cloud user base will rise to one billion by 2015.

Like journalists coping with the internet, those in the IT profession are going to have to quickly adapt to what the cloud means to their profession.

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