Technology usually gets touted as the way forward for the financial services industry but new research shows it could instead threaten the Big Four’s dominance.
Australia’s major banks are increasingly facing competitive threats from technology companies as brand recognition and a physical branch presence becoming less relevant to consumers, a mortgage industry report from J.P. Morgan and Digital Finance Analytics said.
The report shows the disruptive threat of technology companies entering the domestic banking sector which could impact the market share of the major banks, meaning they will need to improve digital capabilities to compete, said J.P. Morgan banking analyst Scott Manning.
“Australian retail banking customers are now one of the highest users of online, smartphone and tablet appliances as a percentage of total interactions globally. Despite the strong take up of digital, allowing consumers to make more informed decisions, this is yet to reflect as a material driver in Australian bank customer satisfaction metrics.
Brand value as a proportion of enterprise value is quite low across all banks, while the high level of brand value in technology companies is matched by a willingness to engage with these firms in banking activities. As a result, technology companies may be able to use their brand power to potentially penetrate retail banking market share without building a physical presence.”
Using smartphones and tablets to do banking is now de rigour across Australia, making up over 60% of total digital device use. While the demand has been driven by the under-35 segment, there has also been rapid adoption among self-funded retirees, who have largely eschewed visiting a branch for day-to-day banking. In 2007 50 % of this group would visit a branch, but this now sits at 33%.
Digital Finance Analytics principal Martin North
said the report challenges the notion that branches are needed to protect existing market share and attract deposit flow.
“The attitudes of the technologically literate have materially shifted compared to previous generations in that branches may no longer provide a trust related barrier to entry.
“The banks need to re-align their branch presence and invest heavily in digital capabilities in order to remain relevant to their evolving client base. Currently these customers are demanding much more than is being offered.
Branch preference seems to be declining for the most profitable customer segments, and digital banking is efficient and shows higher retention rates, prompting questions over the economics of branch banking, North said.
Since 2008, ANZ
has had the highest amount of branches shutting with 30 net branch closures, then NAB
with 25. On the other hand, CBA
has had 30 net branch increases since 2008, and Westpac has had five.
Technology companies who want to enter retail banking markets without the cost of physical networks will be in a good position to engage people who already use technology to do their banking and will quickly accumulate market share, the report said.
“Importantly, this does lay the foundations for an interesting contest going forward for retail banking market share, between well-equipped technology companies aiming to enter financial services or financial services organisations attempting to build improved technology capabilities,” Manning said.
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