Deloitte has proudly sponsored the AFR’s Banking Summit since 2015. In his welcome to attendees, David Myers, the firm’s national banking and capital market sector leader made three reflections on the banking sector for the year ahead.
When I stood at this podium one year ago, I spoke of how the uncertainty of the global macroeconomic environment is impacting Australia’s banking sector.
Well, it’s clear that the more things change, the more things stay the same. The geopolitical uncertainties we faced last year have only exacerbated. Meanwhile the rising cost of living, globally, continues to be a challenge for us all.
And while it seems like interest rates have peaked, attempting to bet on when central banks will begin cutting rates remains, as one says in Australia, a mug’s game.
Overall, it seems the rules of economics remain suspended post-Covid. Despite high rates, growth slowdown and uniform cost cutting in businesses across advanced economies, unemployment remains low, and markets are reaching new highs.
So how does Australia’s banking sector chart a way forward in such a strange world? They have the unique distinction of being small enough to be subject to the external, macroeconomic pressures I have just mentioned.
Yet in Australia, their fundamental importance to our economy is paramount. In our pond, they are big fish. They could rest on their laurels, but what they really need to do is continue to evolve and innovate.
Changing the business model
For example, it is clear the banks know they need to expedite efforts to reduce their reliance on residential mortgages and re-focus on more economically productive activities, like business lending.
Once upon a time most of the loans written by our major banks were business loans. Not long after the deregulatory wave in the 80s, mortgage lending leapfrogged business lending as the great Australian housing boom began to gather pace, leading to the situation we find ourselves in today where well over 60 per cent of the big banks’ loan books are related to housing.
This has been very profitable for the banks but will only remain so if the housing market stays as remarkably resilient as it has been over the past three decades.
But this is not guaranteed, and the recent competitiveness of the mortgage market has seen margins eroded anyway.
The opportunity for the banks lies in pivoting from mortgage lending to business lending, particularly to future-facing sectors, like Green Energy, where Australia has the opportunity to be a world leader.
It could also be argued that there is a strong case for the banks to stage a return to the wealth and financial advice sector. With the asset-rich baby boomer generation in their golden years, we are about to witness the largest intergenerational wealth transfer ever and there will be a burning need for affordable and reliable financial advice.
Of course, the last time the banks went there, it didn’t end well.
That leads me to my next point.
Customer trust
The banks are still recovering from the massive reputational blow dealt by the Hayne Royal Commission. Consumer sentiment surveys show nascent signs of recovery, but it would not be inaccurate to say Australians hold a sceptical view of the banks.
Practices like failing to close the gap between rates paid to savers and rates charged to borrowers, or reducing the size of the retail branch network without due regard to the impact this has on communities and on customer needs, erodes trust.
Another emerging trust issue for banks are scams, which costs Australians billions of dollars every year. Of course, banks aren’t responsible for the scams, but data suggests Australians hold the banks responsible for stopping them. Deloitte’s privacy index survey from last year reveals twice as many respondents were angrier with the organisation, rather than the cybercriminal, when involved in an online scam.
Things like scams, erroneous fee charges and the like often occur due to outdated legacy tech at banks that badly needs to be upgraded.
That brings me to my final point.
Digital transformation
Although progress is no doubt being made, banks need to accelerate the digitisation and modernisation of their core platforms. As well as always wanting a seamless and accessible banking experience within reach, Australians also want one that always works – the number of outages we have seen recently shows we are not there yet.
Of course, it is always possible to let opportunity get away from reality. It’s important that digital transformation capex is watched closely so cost blowouts are avoided and money is not spent on superfluous projects.
There are challenges for the sector ahead. But if our banks can avoid resting on their laurels (and I am sure that they will) then these challenges will bring new growth opportunities that can benefit customers, shareholders, and the Australian economy.