Smartphones displace ATMs, but apps makes a threesome

Customers of Commonwealth Bank are now executing more transactions over smartphones than the ATM network.

And the other big banks are not far behind.

It's a testament to how rapidly we have adopted new technology, and a sign of how developments in the payment system have altered our behaviour and how we deal with banks.

Westpac has also been doing a lot of thinking about the area.

On Tuesday morning the bank's Australian group head, Brian Hartzer, will lay out the blueprint for digital and consumer technology.

He also plans to outline the bank's substantial investment in mobile banking and other digital channels.

UBS bank analyst Jon Mott sees this new type of customer relationship as a potential threat to the banks, because other organisations such as Google and Apple are prowling looking at opportunities to become interlopers.

It's a fascinating idea - and potentially not as futuristic as it sounds given smartphones were introduced less than six years ago.

The newly mobile bank customer is no longer confined to using a branch network - indeed, this has been on the decline for years.

Phone banking is also an outdated way to move funds around or pay accounts. And now even the ATM is rapidly becoming a declining method of accessing funds.

There is no suggestion that the likes of Google or Apple will ever replace primary banking relationships ( unless they get banking licences), but technology may allow them - or others - to get between the bank and its customers and facilitate transactions that are traditionally undertaken directly between a bank and its customer.

These IT entrants that have already played havoc in other areas, such as media and retail, are already developing products in the "digital wallet" area. Google Wallet and Apple's Passbook are just two examples.

PayPal has been active in the payment system for years, and particularly dominant in the US where banking is more fragmented.

The banks are alert to the threat, but according to Westpac it is only a problem if the banks do nothing, and all are active in response to the new way customers bank.

There is significant downside for the banks if they allow themselves to be relegated to a wholesaling role - but Westpac says the industry won't allow that to happen.

The Australian banks have not been flatfooted. Over the past few years they have introduced mobile payment platforms such as CBA's Kaching and ANZ's goMoney.

Traditional banks are clearly at an advantage when it comes to cash transactions. Years ago they ceded ground to sharing credit transactions by doing deals with the likes of Visa and Mastercard.

But there is debate now on whether the use of cash is in decline. There is evidence that the value of cash withdrawals from ATMs has peaked.

By contrast the value of credit and debit card purchases has grown from $176 billion 10 years ago to $408 billion today. Mott says if one assumes cash withdrawals are an indication of cash payments, the value of card purchases is now 70 per cent of the total.

By way of further example, Coles estimates the value of cash sales is down from 45 per cent in 2007 to 33 per cent today.

And the average value of cash transactions across the board is only $12.

But we are a long, long way from a utopian cashless society.

The ramifications for the banks can be good and bad, but Mott takes the view that it is potentially more negative than positive.

On the plus side, banks' ability to invest less in the branch and ATM infrastructure liberates capex and a reduction in handling cash also cuts some bank costs.

On the negative side, bank investment in technology may have to be increased to deal with systems which better facilitate mobile transactions.

Allowing a non-bank player into a threesome with the customer and bank could reduce the transaction fees earned by banks, but encourage customers to become more agnostic about banking relationships. Mott likens the threat to the invasion of mortgage brokers over 10 years ago, who now control 40-45 per cent of mortgage flows.

"A digital wallet controlled by a third party provider or search engine risks introducing even greater disintermediation ... If a customer perceives that every time they execute a transaction they do so via a Google, PayPal or Apple 'wallet' this could change their perception of their banking relationship", he says.

All of this has the potential to eat away at bank interest margins. But the direct impact to bank profits is near impossible to gauge.

But we do know that Australia is among the top few countries in the world for smartphone adoption and penetration - making many industries, including banking, vulnerable to IT predators.