Time For “Digital First” – The Quiet Revolution Report Vol 3 Released

Digital Finance Analytics has released the latest edition of our flagship channel preferences report – “The Quiet Revolution” Volume 3, now available free on request, using the form below.

This report contains the latest results from our household surveys with a focus on their use of banking channels, preferred devices and social media trends.

Our research shows that consumers have largely migrated into the digital world and have a strong expectation that existing banking services will be delivered via mobile devices and new enhanced services will be extended to them. Even “Digital Luddites”, the least willing to migrate are nevertheless finally moving into the digital domain. Now the gap between expectation and reality is larger than ever.

Looking across the transaction life cycle, from search, apply, transact and service; universally the desire by households to engage digitally is now so compelling that banks have no choice but to respond more completely.

We also identified a number of compelling new services which consumers indicated they were expecting to see, and players need to develop plans to move into these next generation banking offerings. Many centre around bots, smart agents and “Siri-Like” capabilities.

We have developed a mud-map to illustrate the journey of investment and disinvestment in banking. The DFA Banking Innovation Life Cycle, which is informed by our research, highlights the number of current assets and functions which are in the slope of decline, and those climbing the hill of innovation.  A number of current “fixtures” in the banking landscape will decline in importance, and in relatively short order.

We are now at a critical inflection point in the development of banking as digital now takes the lead.  Players must move from omni-channel towards digital first strategies, where the deployment of existing services via mobile is just the first stage in the development of new services, designed from the customers point of view and offering real value added capabilities. These must be delivered via mobile devices, and leverage the capabilities of social media, big data and advanced analytics.

This is certainly not a cost reduction exercise, although the reduction in branch footprint, which we already see as 10% of outlets have closed in the past 2 years, does offer the opportunity to reduce the running costs of the physical infrastructure. Significant investment will need to be made in new core capabilities, as well as the reengineering of existing back-end systems and processes. At the same time banks must deal with their “stranded costs”.

The biggest challenges in this migration are cultural and managerial. But the evidence is clear that customers are already way ahead of where most banks are in Australia today. This means there is early mover advantage, for those who handle the transition swiftly. It is time to get off the fence, and on the digital transformation fast track. Now, banking has to be rebuilt from the bottom up. Digitally.

Request the report [44 pages] using the form below. You should get confirmation your message was sent immediately and you will receive an email with the report attached after a short delay.

Note this will NOT automatically send you our research updates, for that register here. You can find details of our other research programmes here.

[contact-form to=’mnorth@digitalfinanceanalytics.com’ subject=’Request The Quiet Revolution Report 3 – 2018′][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Email Me The Report’ type=’radio’ required=’1′ options=’Yes Please’/][contact-field label=’Comment if You Like’ type=’textarea’/][/contact-form]

The first edition is still available, in which we discuss the digital branding of incumbents and challengers, using our thought experiment.

Volume 2 from 2016 is also available.

ANZ adds eftpos cards to Android Pay

ANZ today announced the launch of Android Pay for eftpos cardholders, which means all its Australian customers can now easily make secure payments on their smartphone.

From today ANZ’s eftpos cardholders can access Android Pay to easily make secure purchases on their compatible device wherever contactless payments are accepted.

ANZ continues to lead the banking sector with its mobile payments services by delivering more options for customers than any other major Australian bank.

Commenting on the new mobile payment option, ANZ Managing Director Products Bob Belan said: “ANZ customers now have access to a complete suite of digital payment options regardless of which card or device they use.

“We’re committed to maintaining our leadership position in offering customers new, simple and convenient payment experiences so we’re pleased to provide our eftpos cardholders the option to now make purchases with their Android mobile device.”

To use their eftpos card on an Android device, cardholders simply need to download Android Pay from the Google Play Store and follow the prompts.

Is Peer To Peer Lending Mirroring Sub-Prime?

An interesting paper from the Federal Reserve Bank of Cleveland “Three Myths about Peer-to-Peer Loans” suggests these platforms, which have experienced phenomenal growth in the past decade, resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances and have a negative effect on individual borrowers’ financial stability.

This is of course what triggered the 2007 financial crisis. There is no specific regulation in the US on the borrower side.  Given that P2P lenders are not regulated or supervised for antipredatory laws, lawmakers and regulators may need to revisit their position on online lending marketplaces.

While P2P lending hasn’t changed much from the borrowers’ perspective since 2006, the composition and operational characteristics of investors have changed considerably. Initially, the P2P market was conceived of as individual investors lending to individual borrowers (hence the name, “peer-to-peer”). Yet even from the industry’s earliest days, P2P borrowers attracted institutional investors, including hedge funds, banks, insurance companies, and asset managers. Institutions are now the single largest type of P2P investor, and the institutional demand is almost solely responsible for the dramatic, at times triple-digit, growth of P2P loan originations (figure 2).

The shift toward institutional investors was welcomed by those concerned with the stability of the financial sector. In their view, the P2P marketplace could increase consumers’ access to credit, a prerequisite to economic recovery, by filling a market niche that traditional banks were unable or unwilling to serve. The P2P marketplace’s contribution to financial stability and economic growth came from the fact that P2P lenders use pools of private capital rather than federally insured bank deposits.

Regulations in the P2P industry are concentrated on investors. The Securities and Exchange Commission (SEC) is charged with ensuring that investors, specifically unaccredited retail investors, are able to understand and absorb the risks associated with P2P loans.

On the borrower side, there is no specific regulatory body dedicated to overseeing P2P marketplace lending practices. Arguably, many of the major consumer protection laws, such as the Truth-in-Lending Act or the Equal Credit Opportunity Act, still apply to both P2P lenders and investors. Enforcement is delegated to local attorney general offices and is triggered by repeat violations, leaving P2P borrowers potentially vulnerable to predatory lending practices.

Signs of problems in the P2P market are appearing. Defaults on P2P loans have been increasing at an alarming rate, resembling pre-2007-crisis increases in subprime mortgage defaults, where loans of each vintage perform worse than those of prior origination years (figure 1). Such a signal calls for a close examination of P2P lending practices. We exploit a comprehensive set of credit bureau data to examine P2P borrowers, their credit behavior, and their credit scores. We find that, on average, borrowers do not use P2P loans to refinance pre-existing loans, credit scores actually go down for years after P2P borrowing, and P2P loans do not go to the markets underserved by the traditional banking system.1 Overall, P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances. Given that P2P lenders are not regulated or supervised for antipredatory laws, lawmakers and regulators may need to revisit their position on online lending marketplaces.

 

eftpos launches Android Pay for almost 2m ANZ and Cuscal customers

From ITWire.

eftpos payments are now available on Android Pay, with ANZ and Cuscal being “the first Australian financial institutions to make the service available to eftpos-only cardholders”.

eftpos acting chief executive Paul Jennings said eftpos on Android Pay would “provide eftpos mobile payments to cardholders, with secure access to their own money in real time and less likelihood of being surcharged”.

The service will use “Australia’s first domestic Token Service Provider (TSP) for increased security, by removing confidential consumer card data from the eftpos payment network and replacing it with a unique payment token”.

The eftpos TSP, which was built in partnership with Rambus, “enables eftpos to generate and manage its own payment tokens, facilitating secure digital payment experiences for eftpos cardholders”.

We’re told that the technology provides “additional benefits to consumers when faced with a lost or stolen mobile phone or card. The user is able to disable mobile payments quickly, without needing to cancel the physical card itself”.

ANZ and eight Cuscal-sponsored credit unions and banks are offering customers the choice of using eftpos on Android Pay, including People’s Choice Credit Union, Sydney Credit Union, Woolworths Employee’s Credit Union, CUA, Nexus Mutual, and FCCS.

Jennings said: “Almost two million cardholders will now have the capability to make eftpos payments on their Android mobile devices. This will bring the convenience of secure, in store mobile payments to many Australians for the first time.

“We are thrilled to team up with Google, ANZ and Cuscal to provide customers with access to their own money via their Android mobiles at the shops, with added benefits such as the ability to track their bank balances in real time.”

So, how do you use the service?

Cardholders simply need to download Android Pay at the Google Play Store and follow the prompts.

Pali Bhat, vice-president of Product Management, Payments, Google, said: “We’re excited to bring the security and simplicity of mobile payments via eftpos for Android device owners in Australia.

“Using Android Pay is more secure — and much faster — than rummaging through your wallet for a plastic card. That’s why we’ve worked with eftpos to enable Android Pay at almost 800,000 contactless payment terminals in Australia where people can seamlessly Tap & Pay with eftpos using their Android devices.”

Adding his comments on the new mobile payment option is ANZ managing director of Products, Bob Belan, who said: “This is great news for our eftpos cards customers who can now also use Android Pay to easily make secure payments at contactless terminals.

“Our customers are using mobile payments in growing numbers, and we are pleased be working with eftpos in offering this capability to even more ANZ cardholders before the end of the year.”

Cuscal’s general manager Product and Service, Robert Bell, said: “We’ve partnered with eftpos and Google to ensure that our clients’ eftpos cardholders now have the convenience of paying via their Android phones.

“This adds to our large portfolio of leading digital payment solutions. Cuscal enables multiple financial institutions to compete and lead in payments solutions. We provide our clients’ customers choice in the way they want to pay.”

Auction Clearance Rates Continue To Track Below 70%

From CoreLogic.

This week, there were 2,894 auctions held across the combined capital cities returning a preliminary auction clearance rate of 66.5 per cent, increasing on last week when the final auction clearance rate fell to its lowest reading since early 2016, when 61.5 per cent of the 2,045 auctions cleared. Clearance rates have continued to track below 70 per cent since June the year; this is a considerably softer trend than what was seen over the same period last year when clearance rates were tracking around the mid 70 per cent range for most of the second half 2016.  Results across each of the individual markets were varied this week, with Canberra recording the highest preliminary auction clearance rate of 72.9 per cent, while in Brisbane only 45.7 per cent of auctions cleared.

2017-11-13--auctionresultscapitalcities

The RBA On Business Investment

Deputy Governor Guy Debelle spoke at the UBS Australasia Conference on “Business Investment in Australia“.

He argues that investment has been strong over the last decade, thanks to the mining sector. This is now easing back, and the question is will the non-mining sector start firing or not? Even if it does, they have huge boots to fill!

Investment spending here has been at a historically high level over much of the past decade. This has been primarily due to the strength of investment in the resources sector, which reached its highest share of activity in more than a century. So, unlike in other countries, there has been a significant addition to the capital stock in Australia over the past decade. We are seeing the fruits of that investment in the strong growth in resource exports.

In Australia, investment spending as a share of the economy rose to a multi-decade high around 2012–13 (Graph 1). This stands in stark contrast to the experience in nearly every other advanced economy as well as most emerging economies, with China being a noteworthy exception (Graph 2).

Graph 1: Private Business Investment

Graph 2: Business Investment

Much of that outcome was clearly a result of the record level of investment spending in the mining sector. Investment spending in the mining sector rose from around 2 per cent of GDP in the early 2000s, where it had been for much of the previous five decades to peak at around 9 per cent of GDP in 2012/13. Or, to put that in dollar terms, investment spending in the mining sector in 2006/07 totalled $41 billion and rose to a peak of $136 billion in 2012/13.

He concludes:

  • First, there has not been a lack of investment in Australia over the past decade. Indeed, it has been close to the opposite, with investment reaching a multi-decade peak.
  • Second, the strength of investment spending in Australia has been clearly associated with the mining industry and the spillovers (both positive and negative) of that to investment in other parts of the economy have been greater than we thought ex ante.
  • Third, in reviewing possible explanations for why investment in the non-mining sector in Australia has been weak, the most powerful reason boils down to firms’ expectations of future demand, otherwise known as animal spirits. Mining investment was strong because expectations for future demand were high and there wasn’t that much uncertainty around that expectation. Expectations of demand elsewhere have not been strong.

We are now seeing signs of that dynamic changing around the world and in Australia. With any luck, it will be sustained. This will be timely for the Australian economy as the mining investment story draws to its close.

 

Australia’s decision to allow Mutuals to issue capital instruments is credit positive

According to Moody’s, last Wednesday’s  Australian government announcement that it would accept all 11 recommendations of the so-called Hammond Review on regulatory and legislative reforms to improve access to capital for co-operative and mutual enterprises, is credit positive for these entities because it provides an alternative to building capital with retained earnings. In particular in the banking sector, the allowance also shows that the government regards mutual authorized deposit-taking institutions (mutual ADIs) as integral to healthy competition in Australia’s banking system.

Mutual ADIs will be able to build capital in case of need by issuing capital instruments as opposed to relying solely on retained earnings to do so. In theory, the ability to issue capital instruments could facilitate a significant increase in mutual ADI loan growth: we estimate that mutual ADIs could raise up to AUD 1.2 billion through the mutual equity interest framework, supporting AUD 24 billion (or 21%) growth in loans.

Our estimate is based on mutual ADIs’ capital as of 30 June 2017, applying a 15% cap on the inclusion of capital instruments in common equity Tier 1 (CET1) capital, and a current CET1 ratio of around 14%. However, we do not expect such strong CET1 issuance because the mutual ADI sector is already strongly capitalized relative to the broader Australian banking sector.

Yet, some mutual ADIs with smaller capital buffers may issue capital instruments to support housing loan growth. Australia’s larger banks have moderated their residential mortgage lending as a result of macro-prudential measures to slow house price growth and steadily increasing capital requirements for banks that utilize the internal rating-based model for determining risk-weighted assets.

Since capital instruments issued by mutual ADIs would be equivalent to ordinary shares, and require dividend payments, some in the market are concerned that they will affect the traditional mutual business model.

Accordingly, the Australian Prudential Regulatory Authority (APRA) has proposed a 15% cap on the inclusion of such instruments in CET1 capital, and a cap on the distribution of profits to investors at 50% of a mutual ADI’s annual net profit after tax. These caps ensure that mutual ADIs continue to prioritize the interests of their existing members and are not incentivized to unduly increase their risk profile to boost returns to their new equity holders.

The government’s actions last week follow the July 2017 “Report on Reforms for Cooperatives, Mutuals and Member-owned Firms,” led by independent facilitator Greg Hammond. The government’s decision also follows a July 2017 proposal by APRA to allow mutual ADI to issue directly CET1-eligible capital instruments through a mutual equity interest framework.

‘World-first’ home loan auction platform launches

From The Adviser.

The “world’s first auction-style platform” for loans and deposits has launched, enabling consumers to tender their home loan needs to both brokers and lenders.

Australian fintech Lodex has launched a new online platform that enables borrowers to set up an auction for their home loans, car loans, personal loans (and eventually deposit/savings accounts, credit cards and short-term loans) on their smart device or computer.

After building their anonymous profile, which outlines the lending requirements, and accessing their credit score (via Experian) and social score (via Lenddo) — or “financial potential” for deposits — consumers can then post their loan or deposit requests and wait for offers to come in.

The scores aim to provide lenders and brokers with insights into their individual credit risk, without affecting consumers’ credit score.

All registered lenders and brokers can place indicative offers on the platform within four days.

The consumer, which uses the platform for free, then picks the most suitable deal.

According to co-founders and banking executives Michael Phillipou and Bill Kalpouzanis, Lodex is “the world’s first auction-style platform” that aims to create a “paradigm shift” in the loan process.

Speaking to The Adviser, Mr Phillipou said: “We’re entering exciting times for consumers, lenders and brokers alike. Lodex aims to support all sides in the marketplace. We’re encouraging innovation because it benefits everyone.”

The director elaborated: “From a broker’s perspective, it’s pretty straightforward… everyone is looking for business, everyone is looking for leads and the markets are moving digitally. So, if I’m a broker, I’d always be looking for opportunities to connect with consumers.

“From our perspective, what we’ve done through the platform is to enable a consumer to have significant power, and through that power using data and technology, enable them to get access to a marketplace where they want choice.”

Mr Phillipou, however, said that the platform is not purely focused on rate.

“The consumer can build a unique profile and set out a number of requirements based on what they are looking for,” the co-founder said.

“So, a broker or lender has a number of different attributes based on what the consumer is requesting that enables them to provide an indicative offer [for example, brokers could theoretically provide sub-prime offers via their specialist lender accreditations]. It’s obviously only indicative because any interaction is subject to responsible lending and these brokers and lenders still need to go through their respective steps in order to comply with their responsible lending obligations to make sure it is still suitable.”

The platform is already looking at launching into overseas markets, particularly South East Asia and Europe, which have similar distribution and regulatory frameworks.

The Lodex Advisory Board includes chairman Andrew McEvoy, a former executive at Fairfax Media and managing director of Tourism Australia; marketing and advertising adviser Sean Cummins, the global CEO of Cummins and Partners; strategy adviser Kimberly Gire, a former CFO of retail & business bank at Westpac; and strategy adviser Francesco Placanica, the former CTO of Commonwealth Bank.

Banks Must Go Digital To Protect Margins

Looking across the world of banking, there is one striking trend according to the latest Mckinsey Global Banking Report. Profit remains elusive as margins are crushed. Return on equity is stuck in a range of 8 to 10 per cent (though we note Australian Banks’ are higher!, but are still falling). Recovery from the 2007 banking crisis has, they say, been tepid.

Underlying this is a slowing in revenue growth, currently as low as 3%, half that of the previous five years – so margins are down 35 basis points in China and 46 basis points in the USA. They suggest that in a fully disrupted world ROE could fall to around 5%, compared with around 9.3% without disruption.

They claim the biggest contribution to profitability is not geography, but a bank’s business model.

We found that “manufacturing”—the core businesses of financing and lending that pivot off the bank’s balance sheet—generated 53.0 percent of industry revenues, but only 35.0 percent of profits, with an ROE of 4.4 percent. “Distribution,” on the other hand—the origination and sales side of banking—produced 47 percent of revenues and 65 percent of profits, with an ROE of 20 percent.

Now new digital platform players are threatening customer relationships and stealing margin. But Fintechs, which were seen as an outright threat initially, are now collaborating with major players, for example Standard Chartered and GlobalTrade, Royal Bank of Scotland and Taulia, and Barclays and Wave.

“digital pioneers are bridging the value chains of various industries to create “ecosystems” that reduce customers’ costs, increase convenience, provide them with new experiences, and whet their appetites for more.”

So they argue, banks are at a cross roads. Should banks participate in this new digital ecosystem or resit it? To participate, banks will have to deploy a vast digital toolkit. This offers a path to sustainable higher ROE, perhaps. This is a substantive digital transformation, designed from customer centricity.

The point, we would add from our Quiet Revolution banking channel analysis, is that customers are already ahead of banks, demanding more and better digital services, so first in best dressed!

 

Another Weak Set of Auction Results – 11 Nov 2017

The Domain preliminary auction clearance results are in, and they appear to reveal another weak result, especially in the Sydney market.  The overall rates are lower than this time last year.

The clearance rate in Brisbane was 32% on 143 listed,  Adelaide achieved 76% on 81 scheduled and Canberra 71% on 102 auctions.