Summary: The seeds of the next boom, fascinating digital projects, are buried deep in the budget. Meanwhile, banks are starting to realise that the way they do business is changing rapidly, and the banks that get their digital strategies right will be the ones that win in future years.
Key take-out: The good news for bank shareholders is that the digital revolution will enable growth without big risks. But to gain the full benefit the banks’ clients must undergo their own digital revolution.
Key beneficiaries: General investors Category: Economics and investment strategy, bank stocks.
As an investor I looked at the 2015-16 budget and breathed a sigh of relief that negative gearing, superannuation and dividend imputation remained untouched, at least for the moment.
And the stimulation to small business will help drive many industries and employment.
But where is the excitement? What if I told you that buried deep in the budget are the seeds of the next boom? Dotted in various government departments like health, customs and communications are fascinating digital projects.
But they are not highlighted, so clearly very few in the government understand how the digital revolution can slash government costs.
But in the banking area, banks are starting to wake up that they way they conduct their business in 2015 will be totally different to 2020 let alone 2025.
The banks that get their digital strategies right will be the banks that win in future years. Those that get it wrong will probably be taken over or certainly face deep problems. And the banking digital revolution will be duplicated across most sectors of business including manufacturing where 3D processing will be a major driving force, and the mobile phone will be a major marketing tool in retail. What really drove home to me what is happening to banks is what Westpac has just done to take advantage of the government’s small business package. Westpac has been seen as a laggard in technology but it has undertaken considerable work since acquiring the former Commonwealth Bank technology guru Dave Curran. They now have the ability to comb through their small business customer base and isolate those businesses that have strong cash flow. Westpac has decided to loan to those businesses on the basis of cash flow rather than securing home mortgages, which is the traditional security. Some $30 billion has been pre-approved and stunned small enterprises are being offered credit lines they did not seek and those credit lines will be unsecured.
Westpac high cash flow small enterprise customers will have the funds to take up the government’s accelerated depreciation offer. Other banks should be able to follow – provided they have the technology to isolate their best small enterprise customers.
For Westpac this is seen as simply a small foretaste of what is to come as they develop cloud-based systems. No one will put a number on it but Westpac people would be disappointed if they did not cut costs 20 per cent by 2020-21 and as much as 50 per cent by 2025. These cost reductions will be shared between customers and profits. Westpac believes that the new technologies enable the bank to modernise without changing their base system.
What other banks can match Westpac? There is no doubt that the Commonwealth Bank is ahead of Westpac in many areas.
But the CBA still has a long way to go to achieve the potential offered by digitisation.
And keep your eye on the CBA’s technology department. There are all sorts of stories floating around that might even involve court cases. I do not know how serious it is but such incidents can distract people from what must be the vital driver of bank costs and profits.
NAB took a decision to develop an entirely new banking system. It is using the system in its affiliate U Bank. Far more important for the future of the bank than the current UK gymnastics and capital raising is whether they can match or go beyond CBA and Westpac in technology development. If the system fails or takes too long then the NAB will be under pressure. If it succeeds the bank is away and will be a huge force in Australian banking.
But if the technology does not come into operation for four or five years it may be too late.
ANZ has a lot of work to do.
If Australian banks do not reduce their costs substantially via digitisation then lower cost operators will take segments of the market and mince them. They have no choice but to go all the way.
The good news for bank shareholders is that in normal decades banks can’t grow much faster than the economy or they will be taking risks that are too great. But the digital revolution will enable growth without big risks.
But to gain the full benefit the banks’ clients must undergo their own digital revolution and enjoy similar cost reductions.
These cost reductions will come via labour shedding in many lower and middle pay areas. There will be considerable difficulty finding replacement jobs. What will happen is that many baby boomers will retire and that will generate the jobs to keep people affected by the digital revolution employed.
But it means that the current trends to have more people with higher incomes and more with lower incomes will continue. This hollows out middle Australia. It will create many social problems and require clear marketing focus.