Australia’s big four banks have been put on notice by a bevy of local technology entrepreneurs - they shouldn’t be taking their billions of dollars of annual profits for granted.
Our media heavyweights have had a tough time dealing with disruption and our telcos are scrambling to get their heads around it but are banks a protected species? Or is the merry-go-round of disruption that has upended business models across the board inevitably set to change the rules of the game?
The key elements – virtual currencies, peer-to-peer lending and mobile payments – are already in place, so when Seek co-founder Paul Bassat says that the dominance of the banks and their rivers of gold are under threat, he’s probably on to something.
But traditional banking has been in the crosshairs of internet-driven disruption for decades. Bassat’s warning echoes that of Microsoft co-founder Bill Gates who famously dismissed retail banks as “the dinosaurs of the 21st century” in 1994.
Gates had a point but his grim prognosis hasn’t quite come to pass, something banks and the financial services sector is quick to point out. However, that hasn’t stopped the industry from ensuring that traditional service offerings get a digital makeover.
Going digital is a minimum requirement
There’s a distinct difference between digitising services and innovating business models. It’s a crucial distinction that banks are starting to realise, so it’s not just about putting services online but also about placing bets on start-ups.
Last year Commonwealth Bank chief executive Ian Narev warned that Apple and Google posed the biggest competitive threat to the bank and its peers. Meanwhile, ANZ Bank's chief executive of Australia, Phil Chronican, said that digital payment technologies being developed by Google and Apple could make banks obsolete.
The recognition of what’s looming over the horizon is apparent and while there is an aggressive intent within the ranks, regulatory and compliance issues often prove to be big hurdles for banks. Well, that's the excuse trotted out regularly by the sector anyway.
Culture is an equally powerful deterrent and competition in the digital age is as much about giving customers a great experience as it is about providing a service.
While traditional players still have the ability to dictate terms in the market many are quickly recognising they can't build everything from scratch and rather than stifle innovation, they are better off embracing it.
One local start-up that’s working closely with the big four is Mogo Holdings, which provides the banks the ability to automatically verify the financial details of customers seeking credit, through its app MogoCheck.
Mogo founder Andrew Clouston says that putting services online is pretty much a minimum requirement for banks today but true product innovation is a lot harder to do.
“Creating a new product in a way that appeals to the customers is a lot more difficult and that’s why they are interested in latching on to start-ups and other innovative and nimble players,” Clouston says.
Tip of the iceberg
Westpac Banking Group’s recent decision to pick up an equity stake in Sydney-based peer-to-peer lender SocietyOne is a good example of this new-found impetus among established companies.
SocietyOne is also reportedly in the sights of James Packer and Lachlan Murdoch, with the two moguls potentially eyeing a stake in the business. A sign that old money is taking notice of the shifting dynamics in the financial services sector.
The lending and payments market is proving to be an attractive area for start-ups aiming to undercut traditional players through cheaper transaction fees and competitive interest rates.
Westpac made a $5 million investment in the through its recently minted venture capital fund, Reinventure Group. While $5 million is not an inordinate amount of money, Westpac’s involvement has been widely seen as a big tick of validation for P2P lending.
Meanwhile, Virgin Money founder Sir Richard Branson recently jumped on board online finance start-up TransferWise, which is hoping to use Branson’s money and star power to propel itself further into the mass market.
Founded in 2011, TransferWise is one of a growing list of start-ups taking aim at the financial services market, particularly the egregious fees charged by traditional operators.
While the traditional banks may be chasing the pack as far as mobile payments are concerned, outfits like SocietyOne and Transferwise could just be the tip of the iceberg.
According to Clouston, the payments market is a classic example of big banks missing out on an opportunity but that doesn’t mean they are out of the picture entirely.
“They can still be the power behind the customer transaction gateways,” he says.
The astronomical profits may shrink but the traditional players can still be the providers of centralised infrastructure as long as they are willing to partner with new intermediaries.
In the old world that would have been your mortgage broker, but the digital world belongs to the likes of PayPal and SocietyOne. The digital disruptors are far more pervasive and have much greater reach and that’s why the banks are worried.
Our banks, just like the telcos before them, are being forced to become more customer-centric, and that’s not a transition that happens overnight.