Commonwealth Bank’s Ian Narev said aloud today what he and his senior executives have been saying privately for some time. CBA is as worried about the competitors it doesn’t face today as those it does.
CBA has spent the past half-decade rebuilding its core banking systems at a cost of about $1.2 billion. While it believes that spend and its new capabilities give it a competitive edge relative to the other banks, the investment was also about trying to "future proof" the bank against the threat of a very different kind of competitor.
Narev and his peers at banks and credit card companies around the world are very aware that the heavyweights of the digital environment – companies like Google, Apple, Amazon, PayPal and Facebook – as well as some of the smartphone manufacturers are keenly interested in extending into the financial services space.
He referred to those companies in a speech he delivered to a conference today, saying that they, and credit card companies, were able to target slivers of the financial services value chain via technology and compete with banks, and that CBA needed to be prepared for that.
The most obvious sliver for those companies to target is payments, although the big credit card companies would also be very conscious that they, too, could be early targets of a rush by the internet giants into financial services.
At present most of the big technology companies with consumer bases use banks and other financial institutions for their transactions.
The extraordinary growth rate of smartphones and the consequent explosion in mobile transactions, however, has caused all of them to start preparing for a move into financial services with the creation of digital wallets and the patenting of a range of payment system and other technologies for financial transactions.
Google has invested in a peer-to-peer lending business, PayPal has started accepting pre-paid cards as a means of recharging its users’ accounts. Apple, with a customer base probably approaching 500 million, Facebook with its billion users and Amazon all have their own quite sophisticated payment systems that currently link to bank accounts and/or credit cards – but wouldn’t necessarily have to in future.
There has been a lot of speculation that Apple will soon introduce an iPhone with a near field communication chip in it which its smartphone owners could wave to pay for purchases at bricks and mortar outlets. It and any of its peers could almost certainly gain the requisite approvals to establish or acquire credit card issuing capabilities, whether physical or virtual.
Having seen what the internet has done to the music, book and media industries banks are very aware that they, too, could be over-run by a new breed of competitor without the baggage of their legacy assets and cost bases or the same onerous regulatory oversight and costly prudential requirements.
CBA’s systems give it the kind of real time capabilities for transactions and payments that any challenger might have and it has rolled out a full suite of online services and applications to pre-emptively occupy the more vulnerable spaces. What it sought via the systems rebuild was flexibility and optionality so that it could respond quickly to any emerging disruptive technology-based challenge.
Whether there are cheaper ways of preparing for the challenge than replacing core banking systems is an open question – at this stage only NAB of the other majors is emulating CBA and replacing its core systems rather than just those the customer experiences – but that element of its motivation signals how real and imminent CBA believes the potential threat could be.
What the banks do have going for them is regulation and trust.
It would seem reasonable to assume that (perhaps with some lobbying from the incumbents) any aspiring new tech-based participant in payment systems, for instance, would have to experience some level of regulation.
Given that banks do have whole-of-customer relationships that include savings and borrowings there is an understandable relationship of trust that non-banks find quite difficult to overcome, although PayPal has shown that people will use a non-bank payment system.
It could also be the case, of course, that a Google or Apple might buy themselves a bank or credit card company – Apple’s current $US145 billion of cash reserves, for instance, compares with American Express’s market capitalisation of about $US83 billion.
In any event, the digitisation of banking is here to stay and the challengers will eventually come, using smartphones and tablets as their weapons of choice. At that point the effectiveness of the defences of CBA and its peers here and around the globe will be tested.