Hat trick of disrupters coming this way

Twenty years ago non-bank lenders shattered banks’ cosy mortgage market. More recently, mortgage brokers have made them lift their game again. Technology is the next force to test the banks’ mettle.

JP Morgan’s latest Australian Mortgage Industry report argued last week that Australia’s love affair with digital banking has reduced the value of bank brands and bank branches. In doing so the way has been cleared for technology disrupters to bypass the traditional barriers to entry the big banks have enjoyed.

The research by JP Morgan’s equity analyst Scott Manning, in collaboration with Digital Finance Analytics (DFA), found in the context of digital banking, technology companies have far stronger brand value than banks and digital natives are very willing to engage with them in banking activities.

Thus new technology entrants may be able to use their brand power to penetrate retail banking market share without having to build a physical presence.

This lays the foundations for an interesting ‘contest’ over retail banking market share between well equipped technology companies aiming to enter financial services and banks attempting to build improved technology capabilities.

Disruption moves quickly

Back in the 1990s, cost-efficient funding from securitisation helped wholesale lenders’ share of new home loans to increase from virtually zero to 15 per cent in just over 10 years. Likewise, after suffering a blow immediately after the global financial crisis, mortgage brokers have rapidly grown and now originate 45 per cent of all new home loans.

At the same time, a regulatory push away from complexity to more simple products and banks’ search for cost efficiencies against a backdrop of subdued revenue growth have resulted in fewer, simpler, more similar products, putting the onus on price and execution.

Meanwhile technology is making consumers more informed with 77 per cent of home lending applications starting with online research according to Google. The resurgence of brokers is further reducing information asymmetry.

Manning contends there’s been another less talked about change, namely attracting deposits. It used to be that bank branches were the main entry point for deposits from which a bank could pitch its mortgage offering.

“In our view, this relationship has now rotated 180 degrees with a standardised mortgage offering now bringing in the deposit flow attached, thereby once again putting into question the relationship between established branch presence and deposit gathering capability,” he said.

Manning cited research by Bain & Company that showed 80 per cent of companies believe they provide a superior proposition but only eight of per cent of companies’ customers agree.

“With the major banks having net promoter scores close to zero historically, we would argue that banks are struggling to figure out how to use the rapidly changing technology and customer landscape to provide value to customers,” he said.

Fragmentation of the banking market

Research by UBS indicates that bank profit margins on new mortgages are at near-record levels while Manning’s analysis found that returns on their credit card portfolios are over 40 per cent, having doubled since 2008 to offset pressure in other areas so new players can “nibble away at that over time.”

With the rise in mortgage brokers over the last 20 years, DFA’s principal Martin North said that “as markets get deeper and more complex, these revenue streams are at risk.”

He expects the result will be a fragmentation of the banking market similar to the demise of newspaper companies’ big mastheads.

“The ones who do best will be those who understand their customers and can meet those needs,” said North.

He predicted that technology companies’ first move will be into savings and wealth management. “There will be a lot of action from technology because there’s less regulation and people are increasingly taking charge of their own money.”

“They have the brand, the platform and the customers, so it’s a logical extension,” North said.

Banking, Technology,
mortgage brokers, disruption, technology, JP Morgan, Digital Finance Analytics, DFA, Bain & Company
Marion Williams, mwilliams@financialpublications.com.au
Article Posted:
April 09, 2014

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