Five forces that are redefining banking

Behind the scenes the reality is very different. The nation’s banking sector is highly dynamic, and it’s probably fair to say the industry is facing greater winds of change today than at any other time in the past.

In particular, there are five main forces at play that look set to reshape the industry we work in. For brokers, whose business is intrinsically tied with the banks, it is worth understanding these forces and their likely impact on the sector.

Force one: record-low credit growth

Reading through tabloid reports of skyrocketing property prices, it’s easy to assume the home loan market is also booming. Yet that’s certainly not the case. Home loan lending is, in fact, rising very slowly at present – certainly by historical standards. By way of example, 10 years ago in 2004, home loan credit was growing above 20 per cent annually.

In this sort of environment it was far easier for banks to generate profits. Fast forward to 2014 and home loan credit is expanding by just 6 per cent per annum, with investors rather than homeowners accounting for a high proportion of total demand.

Economic conditions are partly to blame for sluggish credit growth. Ironically, an additional factor is today’s historically low interest rates. These are allowing borrowers to pay off their loans faster.

Indeed, in some cases, borrowers are paying back home loans as fast as the banks can lend, and that means zero credit growth.

For brokers this situation provides valuable opportunities but also challenges. Banks are fighting for a slice of a smaller pie, and this has led to some exceptional deals, and also some unusual marketing tactics among lenders – including cash giveaways.

The key for brokers is to help consumers weigh up whether a short-term perk outweighs a product that offers lasting value over the life of a home loan.

Force two: record-low cash rate

A second force reshaping our industry is an official cash rate (currently 2.5 per cent) that is at its lowest level since 1993. It is part of a deliberate strategy by the Reserve Bank to support Australia’s economy as we transition from mining to non-mining investment, and it has had a noteworthy impact on the property market.

Low rates have helped fuel demand from property investors, further underpinning property prices (often to the detriment of first home buyers). 

For brokers, this has provided tremendous scope to tap into the investor market, and also to assist home loan customers seeking to refinance for a better deal. But at times like these an element of customer education is critical.

In a sustained period of low rates, it can be easy to overlook the cyclical nature of interest rates, and it is essential to encourage borrowers to only take on debt they can comfortably manage. A survey by ME Bank found that around 45 per cent of borrowers are just managing to meet their current loan repayments.

That poses a real concern for when interest rates eventually rise again.

Force three: the Financial System Inquiry

Our third force driving change in the industry is the Commonwealth government’s Financial System Inquiry (FSI).

It is being hailed as providing a new blueprint for the nation’s financial sector. That’s a big claim, though it does set out to address, among other things, competition in the banking industry and this makes FSI important for all of us – brokers, bankers and consumers.

At present, the big four banks are well placed to secure cheaper funding than the smaller banks. This is partly based on the unwritten expectation that the federal government would bail out the major banks if they ran into trouble.

This ‘too big to fail’ concept means the nation’s largest banks enjoy a lower risk rating, which translates to cheaper funds – and a significant competitive advantage.

Current industry regulations also contribute to an uneven playing field, with capital requirements currently favouring large banks. In its submission to the FSI, the Australian Bankers Association noted that:

“In mortgage markets, ‘standardised’ banks (generally smaller institutions) are required to hold larger capital reserves against loans than ‘advanced’ banks. This effectively means that they are required to fund the same asset at a higher rate, thus incurring additional costs.’’

If the FSI does result in reforms being introduced - and only time will tell – our industry could be reshaped to allow all participants more equal opportunities. Ultimately, that would mean more competition and a better deal for everyone.

Force four: changes to credit reporting laws

In March 2014, consumer credit records were expanded, and in the future they will feature considerably more information about an individual’s borrowing behaviour and money management – including, for the first time, details about positive credit behaviour.

This provides lenders with a more holistic basis on which to determine a borrower’s credit risk. What is less well understood is how this is also a step forward for consumers.

For many people, the new credit reporting laws will improve their likelihood of securing a competitively-priced loan from a mainstream lender (as opposed to, say, a payday lender) – and this is creating growth opportunities for brokers.

Maximising this opportunity will require an enhanced investment in consumer education, targeting borrowers who may never have considered approaching a traditional lender in the past. There is certainly an opportunity for brokers to assist in this education space.

Force five: digital disruption

The fifth – and final - force shaping the banking sector centres on the impact of technology. To date, banking is one of the few industries to avoid a shake-up as a result of new technology. Other industries haven’t been as lucky.

Amazon for example, threw a curve ball at the book retailing industry, while at the extreme end of the scale, former household names like Kodak have been hit hard by the digital revolution.

It’s difficult to see how the banking industry can avoid the impact of emerging technology as tech companies eye the huge profits of the major banks and look for ways to get a slice of the action.

Already we’ve seen new providers deliver innovative payment systems like Paypal that let consumers sidestep some of the services normally provided by banks.

For both banks and brokers, the arrival of peer-to-peer (P2P) lending will have significant implications. While SocietyOne may be the only P2P provider in Australia at this stage, that’s likely to change as others jump into that market space.

Already banks are responding to this force with upgrades to often archaic technology systems that offer the ability to provide new services that will surprise and delight customers – and hopefully hold off the new technology disruptors.

Longer term, the potential for digital disruption is putting the onus firmly on banks – and brokers – to enhance both their offering and service proposition.

The fact is, a healthy industry is one that continually evolves and rises to meet new challenges. It is our ability to adapt to, and grow, with change that will truly determine the future of our industry.

Stewart Saunders is national manager of brokers at ME Bank