Category: Channel Usage

Industry heads speak out on channel conflict

From The Adviser.

The head of a major aggregator and the executive director of an industry association have hit out at reports of channel conflict between banks and brokers.

Following The Adviser’s article yesterday concerning reports of a CBA branch offering to refinance a customer’s home loan at a “lower rate than his broker” (to which CBA and Aussie have not yet responded), two heads of industry have spoken out on this type of behaviour.

Speaking to The Adviser, Peter White, executive director of the Finance Brokers Association of Australia (FBAA), said that “if this is true, then for a bank branch to be doing that, it is unequivocally and unquestionably disgraceful”.

Mr White said: “The bank already had the client, I don’t think the bank branch should have that sort of authority to be able to do that in the first instance because what they are doing is reducing the margins that the bank has already accepted on a transaction.

“So, this is just a deliberate undercutting means, not to gain a client, but specifically to target brokers… If the bank has the ability to reduce the interest rate, they should offer it to everyone in the marketplace.”

He continued: “I think that whatever branch has done this needs a serious reprimand from CBA. If other branches do this, it has a significant impact on the bank’s lending portfolio and the margins and actually hurts the bank’s bottom line profitability-wise – because it’s actually more cost effective to write a loan through the broker network than the branch network.”

Mr White added that it “added greater insult to injury” that the broker who had written the loans originally was an Aussie broker, given that CBA “has a huge financial interest” in them.

He said that channel conflict and clawbacks are forming part of the discussion that it is putting together for the ASIC remuneration review and Sedgwick review.

Raise it with your aggregator

Mark Haron, the director of aggregation group Connective also spoke to The Adviser following the release of the story, saying that he would be “having a chat” with CBA.

While he added that he had not yet received notification from Connective brokers of CBA acting in this way, he emphasised that it is “really important that when brokers find these channel conflict issues that they immediately raise it with their aggregator”.

He commented: “This type of thing does undermine the relationship between the bank and the broker. Whether it’s a one-off or whether it’s systemic, the aggregator should be talking to the bank about it and trying to do something about it either way.

“So, the best way to manage it is to raise it to the aggregator so that the aggregator, through the agreements with the banks, can have each one dealt with.”

Mr Haron said that in the past he had found the banks to be “very, very responsive to any individual or potentially systemic channel conflict issue” and would make adjustments, where necessary.

However, he said that if this “stops happening and the banks are unapologetic” and were treating the broker channel differently, then Connective would be “making sure that the brokers are made aware of that and the brokers can determine whether or not they want to continue their own business with those banks”.

Touching on comments made by Digital Finance Analytics’ principal Martin North earlier this week, which suggested that some big banks had changed their appetite for broker-originated loans, Mr Haron said that he did not believe banks were changing tack on how they deal with brokers “at this stage”.

He said: “We’re not seeing it at this stage, but that’s not to say that they won’t.

“There are some of the major banks, like Westpac and CBA, that are being more focused on the proprietary channel and how they can serve customers better through that, and that’s understandable, because that’s how banks will always want to operate. But, if they do that to the detriment or by neglecting a broker, then it will hurt the overall market share.”

He continued: “I think most banks are aware of that and they will certainly see that played out if they don’t look after brokers. Certainly, if they don’t support brokers or see more conflict issues arising where it is clearly systemic and not a one-off, it will be quite detrimental and problematic for any bank that decides to go down that path.”

Major bank branch undercutting broker rates

From The Adviser.

The Adviser has learned that CBA could be actively targeting home loan customers that were introduced by brokers with the promise of a better rate should they refinance via a branch.

Despite the bank telling The Adviser earlier this week that it is once again accepting new refinance applications for investment home loans with P&I repayments through broker channels (following a hiatus on new investor refinance applications in February), concerns that some of the major banks are favouring their branch networks over the broker channel are rising.

Adding to the speculation, a source speaking to The Adviser said that he was actively targeted to refinance his home loan during an application for a credit card at a North Sydney branch of the Commonwealth Bank of Australia (CBA).

During the assessment process the source was surprised to hear that the branch could give him a “lower rate than his broker” if he refinanced his home loan directly with CBA.

The loan was originally written by an Aussie broker.

When asked how the branch was able to do this, the representative at the bank told the CBA-customer that he had been told by his manager to refinance broker-originated loans where possible.

The Adviser can confirm that a representative at the Walker Street branch in North Sydney said that they could give a CBA customer a ‘better deal’ than a broker on a refinance loan.

When asked by The Adviser whether CBA is looking to reduce its mortgage flows through the broker channel, a Commonwealth Bank spokesperson said: “Commonwealth Bank is committed to consistently delivering the best customer outcomes for home buyers, and mortgage brokers are an important part of how we meet the home buying needs of customers.”

Proprietary channels a ‘strategic priority’ for CBA

However, the bank has been open in its preference to boost the proprietary channel, telling The Adviser in February that it was a “strategic priority”.

Following the 2017 half year results announcement in February (which showed a 4 per cent drop in broker market share over the six months to December 2016), The Adviser asked CEO Ian Narev whether the bank was moving away from the broker channel.

Mr Narev said that while the broker network “provides a really important proposition that customers like and want” and will be a “critical part of the group strategy”, the “preference” was for customers to go through the proprietary channel.

He said: “[O]ur preference is always going to be, as you can imagine — for all sorts of reasons — to service as many of our customers through our own channels as we possibly can. That’s a strategic priority for us.”

Mr Narev told The Adviser that the increase in loans being written directly through the bank was due to the fact that it had “upgraded and put more lenders in the branches — people who are able to have lending specific conversations with customers”.

He added: “We’ve been able to provide more analytics to support those lenders and others in the branch and we’ve really invested in the branch proposition and as a result of that we’ve seen our own share of the proprietary channel go up at the time when the markets have gone down — so for us that is a pretty good outcome.”

Lloyds Bank is shrinking hundreds of UK branches to be staffed by just 2 people

From Business Insider UK.

Lloyds Bank intends to shrink hundreds of its UK branches due to growing numbers of customers using online banking, according to a BBC report.

Its new “micro-branches” will have no counters and just two staff carrying mobile tablets, who will help customers use in-store machines, such as pay-in devices.

 

The new “micro” format will use much less space than existing branches, in some cases as little as 1,000 square feet.

The bank said the reason for the move was a “profound change in customer behaviour” which has seen growing numbers of transactions move online.

Some of the branches being converted will be Halifax and Bank of Scotland branches.

Jakob Pfaudler, Lloyds’ chief operating officer for retail, told the BBC: “We have a lot of branches that used to have a lot of footfall, and therefore feel quite empty and intimidating for customers. So when there’s too much space we may board up places in existing branches.”

In 2014, Lloyds announced a separate plan to close 400 branches over three years, with the loss of 9,000 jobs. It will have 1,950 left in the UK by the end of 2017.

The BBC Does Fintech

Interesting programme from the BBC looking at UK developments in Fintech. The discussion centered on how mobile devices are fundamentally changing banking and why incumbents are struggling to respond. Listen to the programme, or download it here.

The UK is a world leader in financial services technology, otherwise known as fintech.

Presenter Evan Davis asks how Britain has beaten Silicon Valley and what challenges fintech poses to traditional banking?

Guests:
Antony Jenkins, Founder and Executive Chairman, 10x Future Technologies
Ishaan Malhi, Founder, Trussle.com
Eileen Burbidge, Co-founder, Passion Capital

Employment Data Disappoints

The ABS data on employment to February 2016 revealed a nasty surprise with trend unemployment restated higher, and seasonally adjusted also up. The question of course must be, given the various tweaks done by the ABS are these numbers accurate? The trend unemployment rate in Australia was 5.8 per cent. The trend participation rate was unchanged at 64.6 per cent.

Full time jobs were up a little by 27,100, but part time jobs fell 33,500; hence a net drop. Across the states, Victoria added 10,600 jobs, but Western Australia and Queensland jobs fell by 5,500 and 11,500, respectively.

New South Wales has the lowest rate at 5.2 per cent whereas Queensland had the highest rate at 6.7 per cent. Weirdly, in Western Australia the rate fell 0.4 per cent but this was to a fall in the state participation rate.

“Over the past year, we have continued to see a relatively steady trend unemployment rate between 5.7 per cent and 5.8 per cent,” said the Acting General Manager of ABS’ Macroeconomic Statistics Division, Jacqui Jones. It should be noted that January 2017 trend unemployment rate was revised up from 5.7 per cent to 5.8 per cent, as part of the standard monthly revisions.

The quarterly trend underemployment rate remained at 8.6 per cent. “The underemployment rate is still at a historically high level for Australia, but has been relatively unchanged over the past two years,” said Ms Jones.

Trend employment increased by 11,600 persons to 12,005,000 persons in February 2017, reflecting an increase in both full-time (4,600) and part-time (6,900) employment. This was the fifth straight month of increasing full-time employment, after eight consecutive decreases earlier in 2016.

Total employment growth over the year was 0.8 per cent, which was less than half the average growth rate over the past 20 years (1.8 per cent).

The trend monthly hours worked increased by 1.2 million hours (0.1 per cent), with increases in total hours worked by both full-time workers and part-time workers.

The trend participation rate was unchanged at 64.6 per cent.

Trend series smooth the more volatile seasonally adjusted estimates and provide the best measure of the underlying behaviour of the labour market.

The seasonally adjusted number of persons employed decreased by 6,400 in February 2017. The seasonally adjusted unemployment rate increased by 0.2 percentage points to 5.9 per cent, and the seasonally adjusted labour force participation rate was unchanged at 64.6 per cent.

Broker clients have ‘extreme’ sensitivity to rate changes

From The Advisor.

A JP Morgan report into the mortgage industry has found that customers who obtained a home loan through a broker are far more sensitive to rate changes than those who visited a bank branch.

The latest Australian Mortgage Industry Report – Volume 24, released yesterday, explores the potential impact on borrowers of significant mortgage repricing as Basel 4 capital requirements loom for Australia’s biggest mortgage providers.

When it came to sensitivity to higher rates, the report found that loans originated by third parties have a substantially higher sensitivity to rate changes. The report noted that this is likely due to larger loans being written by brokers and that broker usage is higher among interest rate sensitive borrowers.

Interestingly, the report noted that interest rate sensitivity is relatively consistent across interest only and principle and interest loans.

Digital Finance Analytics principal Martin North, who collaborated with JP Morgan on the report, said these findings reflect the different mix of customer behaviour and customer types who visit brokers.

“One of the critical things that we look at is whether people are ‘soloists’, meaning that they want the lowest price they can get, or whether they are ‘delegators’, meaning they are more worried about customer experience and the whole package rather than the price,” Mr North explained.

“Price sensitivity is much more extreme for people who go via brokers. There is already an urge to find the best deal if you go to a broker. Secondly, brokers have the ability to look across the market and across multiple lenders and they know from their experience where the best deal might be for a particular borrower at a particular point in time,” he said.

“The net result is that there is a higher risk footprint in loans written via third-party than first-party, and that is something which needs to be recognised in terms of how pricing is done and also how risks are managed.”

ATMs Out-evolved By Mobile Phones

There is an inevitable decline in the volume of transactions through Australian ATMs as alternative, mainly non-cash alternatives bloom.

Data from the RBA shows the volume of ATM cash withdrawal transactions has fallen by 15% over 3 years, whilst the gross value has slipped a little (and fallen in post-inflation adjusted terms). Debit card transactions are more than taking up the slack. But there is also more going on here.

We had the chance to discuss this on Perth radio and coverage in an article in the Herald-Sun.

There is a generation shift in play as digital natives continue to adopt smartphone based payment options, from Applepay, to NFC transactions in shops, or apps like paypal as well as the move to debt. Even digital migrants are using electronic mechanisms, such as smart phones,  internet banking, contactless payments and Bpay is also a popular option.

We are approaching a tipping point where the economics of ATMs will not make sense, other than at a few high traffic locations, as there a fixed costs relating to installation and maintenance (including the cash top-up) and income is linked to volumes. There was a proliferation of third party ATMs in for example retail sites in the 1990’s, but these are getting less use too. So we think the number of machines will fall.

Meantime the ubiquitous smart phone is set to become your personal finance assistant, your electronic wallet and electronic credit card. Just do not loose your phone!

As a result, traditional channels such the the branch, ATM and even plastic are all under threat. Cash will become less important in every day life, but it will remain, used perhaps by people less comfortable with the technology, or in the black economy. It would not surprise me if down the track larger bank notes started to disappear under the guise of migration to digitally based more cost-efficient payment solutions, which just happen also to be easier to track.

Meantime, the ATM just got out-evolved by the smartphone.

YouTube Users Now Watch 1 Billion Hours Per Day

YouTube’s reliance on algorithm-driven traffic expansion continues as it reaches views of 1 Billion hours per day, as reported in ZeroHedge.

In a dramatic confirmation of the relentless growth of online video, at the expense of the agonizing, slow death of conventional TV, YouTube said that its worldwide viewers are now watching more than 1 billion hours of videos a day, on pace to eclipse total US TV viewership over the next few years, a milestone facilitated by the Google aggressive embrace of artificial intelligence to recommend videos. By comparison, Americans watch 1.25 billion hours of live and recorded TV per day according to Nielsen, a figure that has been steadily dropping in recent years. Facebook and Netflix said in January 2016 that users watch 100 million hours and 116 million hours, respectively, of video daily on their platforms.

According to the WSJ, YouTube surpassed the “psychological” figure, which was far higher than previously reported, late last year. Indicatively, in 2012 when Google started building algorithms that tap user data to give each user personalized video lineups designed to keep them watching longer, users spent 100 million hours on its platform, a ten-fold increase in under five years, growing at a pace of roughly 200 million hours per year. Of course, what makes YouTube so unique, is that a vast majority of the content is crowdsourced: feeding the AI recommendations is an unmatched collection of content: 400 hours of video are uploaded to YouTube each minute, or 65 years of video a day.

What is surprising is that despite YouTube’s massive size, it remains unclear if it profitable. Google’s parent Alphabet doesn’t disclose YouTube’s performance, but people familiar with its financials said it took in about $4 billion in revenue in 2014 and roughly broke even. Like most of its social network competitors, YouTube makes most of its money on running ads before videos but it also spends big on technology and rights to content, including deals with TV networks for a planned web-TV service. When asked about profits last year, YouTube Chief Executive Susan Wojcicki said, “Growth is the priority.”

Get cash without a card using your mobile.Meanwhile, in a near-monopolistic synergy, YouTube benefits from the enormous reach of Google, which handles about 93% of internet searches, according to market researcher StatCounter. Google embeds YouTube videos in search results and pre-installs the YouTube app on its Android software, which runs 88% of smartphones, according to Strategy Analytics.

That has helped drive new users to its platform, and the statistics are staggering: about 2 billion unique users now watch a YouTube video every 90 days, according to a former manager. In 2013, the last time YouTube disclosed its user base, it said it surpassed 1 billion monthly users. YouTube is now likely larger than the world’s biggest TV network, China Central Television, which has more than 1.2 billion viewers.

A recent adjustment to the YouTube algorihms helped:

 YouTube long configured video recommendations to boost total views, but that approach rewarded videos with misleading titles or preview images. To increase user engagement and retention, the company in early 2012 changed its algorithms to boost watch time instead. Immediately, clicks dropped nearly 20% partly because users stuck with videos longer. Some executives and video creators objected.

Months later, YouTube executives unveiled a goal of 1 billion hours of watch time daily by the end of 2016. At the time, optimistic forecasts projected it would reach 400 million hours by then.

YouTube retooled its algorithms using a field of artificial intelligence called machine learning to parse massive databases of user history to improve video recommendations. Previously, the algorithms recommended content largely based on what other users clicked after watching a particular video, the former manager said. Now their “understanding of what is in a video [and] what a person or group of people would like to watch has grown dramatically,” he said.

And while it hardly needs it, YouTube’s reliance on algorithm-driven traffic expansion continues: “last year YouTube partnered with Google Brain, which develops advanced machine-learning software called deep neural networks, which have led to dramatic improvements in other fields, such as language translation. The Google Brain system was able to identify single-use video categories on its own.”

Meanwhile, per just released research from the EIA, according to the latest Residential Energy Consumption Survey (RECS) the number of TVs in active use per US household is declining: an average of 2.3 televisions were used in American homes in 2015, down from an average of 2.6 televisions per household in 2009.

As shown in the chart below, the number of homes with three or more televisions declined from the previous survey conducted in 2009, and a larger share of households reported not using a television at all. Televisions and peripheral equipment such as cable boxes, digital video recorders (DVRs), and video game consoles account for about 6% of all electricity consumption in U.S. homes.

The study also found that entertainment and information devices vary by age: younger households tend to have a lower concentration of televisions per person and a higher concentration of portable devices such as laptops.

The good news: the slow death of corporate-owned, legacy mainstream media continues; the bad news: it is being replaced by the hyper-corporate Google and FaceBook, which in recent months have decided to put on the mantle of supreme arbiters of what is and isn’t considered “fake news.”

CBA Prunes Brokers

From Australian Broker.

The Commonwealth Bank of Australia (CBA) has sent out a note giving certain brokers two weeks’ notice for the revocation of their accreditation.

The note was sent out to a segment of accredited brokers which CBA had identified as being “inactive” with the bank for quite some time, a bank spokesperson told Australian Broker. This was part of an ongoing review of CBA products and services.

“To ensure we uphold the highest level of professional standards, and continue to meet the needs and expectations of our customers, those mortgage brokers who have been inactive will no longer be accredited with us,” they said.

Brokers were deemed inactive if they had not written a CBA home loan in the past year or if they had only written a single mortgage. Once identified, brokers are notified that their CBA accreditation will be resigned following the bank’s agreement with the broker’s head group.

The letter provided recipients with 14 days’ notice, starting from the date the letter was sent, in which the bank would revoke the broker’s authority to act.

“This means you will no longer be able to submit home loan applications to the Commonwealth Bank. Please be advised that effective immediately, we will not accept any new home loan applications from you,” the note said.

By freezing loan applications, this stops new loans from being written by brokers about to lose their accreditation which could cause issues for the customer.

Brokers who want to appeal this decision can contact their relationship manager or head group representative.

The note brings into question how independent brokers are from the banks, Mark Harris, director and owner of THE Home Loan Broker, told Australian Broker.

“What does this say? If I don’t believe that CBA is the best fit for my client, are they essentially trying to force me into making them a choice?”

“This is a very big heavy stick to say, ‘Well, you’ll use us anyhow’. I really wonder how interested ASIC would be in this. It sends a very bad message about the industry by taking our entire independence away.”

The note also shows “absolute disrespect” to brokers and potential clients, Harris said. While he understands that CBA has every right to make a decision like this under their business, he would not be encouraging the six brokers under him to use the bank.

“The main reason for this is what if a broker was talking to someone today and decided to do an application with Commonwealth Bank tomorrow and then tomorrow night before they got to lodge that application, the bank cancelled their accreditation?”

“I think it’s appalling. They’re not giving any notice. The note states that you can’t lodge any more loans as of now and you’ve got two weeks to settle anything that’s in the system.”

The decision was “kind of odd” given that brokers use different lenders at different frequencies, Harris said.

“The email was obviously alluding to their belief that if you aren’t actively giving them business that the customers aren’t going to get best practice customer service.”

“I find that very hard to believe. No other lender believes that because no other lender does this sort of thing.”

Over the past two years, Harris acknowledged that he had only used CBA once when he sent through a $900,000 loan last October. The application “flew through with no problems,” he said.

Digital Trumps Branch

Buried in the CBA results presentation today was a series of charts which shows just how far digital has come.  Just as predicted in our Quiet Revolution Report.

Yet, as banks focus on more younger, digital users, they see a decline in satisfaction from older, less digitally aligned households. See the change in Main Financial Institution (MFI) by age bands.

… and relative needs met by age.

Yet transaction migration is well underway. CBA showed the fall in branch deposits and withdrawals…

… and ATM transactions as cash becomes less critical compared with electronic transactions.

On the other hand, point of sale transactions have risen strongly …

… as well as internet transactions.

This is the killer slide – app use, cardless cash and tap and pay volumes are rising fast. Mobile first is here.

Yet they also reported an increase in sales from smaller but reconfigured branches, with home lending applications up 13%, and reducing broker originated volumes, and a 10x increase in branch leads and 95% contact rates leading to 3x higher conversion rates.

The new branch is smaller, more tech, and focuses on customer relationships.

But transformation of banking distribution has profound consequences, in terms of economics, profitability and customer satisfaction, and there is no doubt that digital will trump branch (just watch kids with their digital devices and how naturally they use them). It just depends on how long it takes.