ANZ deal redefines bank core businesses

A payments joint venture saves ANZ an initial investment of $200m and halves the deployment time to 18 months. Picture: Hollie Adams/The Australian

Deals like ANZ Bank’s sale of its merchant acquiring business into a $925m joint venture with Worldline, the world number four in payments and transaction services, are redefining the core businesses of legacy banks.

Not so long ago, the idea that ANZ would exclusively refer merchants to a 49 per cent-owned, purpose-built joint venture would have been heresy: why go to all the effort of bringing the businesses on-board only to palm them off to a minority-owned entity?

There are now two reasons.

ANZ, which manages two billion transactions a year for 80,000 physical and online merchants, could have spent about $200m on development of its own platform.

While the bank would have sharpened its online offering – a glaring weakness given industry trends – constant investment and innovation would have been needed to stay competitive.

Further, ANZ thought it would take three years to build the required capability.

This was double the time for merchant customers to benefit from Worldline’s ready-made products and services, including digital onboarding, alternative payment methods, fraud detection, and online and omnichannel capabilities.

The clincher, though, was the way the deal was structured to take account of the critical importance of data.

Legacy banks have previously partnered with the likes of Worldline, but control of the data flow and its use for critical customer insights has often passed to the technology provider.

Many of those deals have been subsequently unwound.

“So the transactional capability was important, but what was really important was the data and the insights we can provide to our customers,” ANZ head of commercial and retail Mark Hand says.

“That was a non-negotiable for us – we wouldn’t have done a deal if we didn’t have ownership of the data.

“(The reason is) we don’t want to be some commodity provider and help other organisations build great customer experiences, or just use our balance sheet or distribution capability, so we’ve been through our portfolio of businesses and made calls around what we think is core and important to the bank.”

The ANZ commercial acquiring unit is the third biggest payment and acquiring business in Australia, with a 20 per cent share of transaction volumes.

The customer base spans small and medium-sized enterprises to large corporates, with the bank’s home base in Victoria the most important state market (28 per cent share), followed by NSW (also 28 per cent), and Queensland (20 per cent).

As for Worldline, the attractions of the deal with ANZ are obvious.

Australia is a safe, growing and reliable market, boasting a high level of adoption in electronic payments and ranking number four globally for payment terminals per capita.

While consumer use of contactless cards and digital wallets is among the highest in the world, cash penetration in the system is still relatively high.

This presents an attractive opportunity as cash usage switches to cards, in a trend which has been exacerbated by the pandemic.

The business, which was valued at $925m for the Worldline transaction, booked $173m in revenue last year for a net profit of $42m, after paying $35m in group allocated costs.

Under the terms of the deal, ANZ will refer new merchants to the joint venture, which, in turn, will refer its customers to ANZ for banking products.

The partnership has an initial term of 10 years, with the joint venture board comprising three Worldline directors and two appointed by ANZ.

Completion of the transaction by the end of next year will lift ANZ’s level two common equity tier one ratio by about five basis points.

Brighter economic outlook

The brighter economic outlook which sparked a huge rally in bank share prices has continued since the major-bank full-year profit season.

ANZ commercial and retail boss Mark Hand says the trend in deferred housing and business loans is unchanged, with about 80 per cent of customers moving seamlessly back to repayments when their deferral periods expire.

Even customers in hardship have been adopting a sanguine approach, taking the initiative to regroup and preserve some equity by selling their homes into a relatively strong property market.

In previous downturns, they would have been inclined to hold on as long as they could.

“And that’s completely understandable,” Hand says

“But when prices are rising, smart customers are saying: ‘I can walk away with capital, put that in the bank and when I’m back in secure employment I’ll have a deposit to move back into the market’.”

“They’ll get a fixed-rate mortgage next year at a very attractive rate.”

Importantly, as well, there has been no interruption to the pace of the Victorian recovery.

The volume of transactions in the state, according to ANZ credit card data, is three per cent ahead of where it was pre-COVID a year ago; an outcome which Hand describes as “staggering”.

There are a few offsets which could partly explain the phenomenon, such as the continuing swing from cash to cards, and higher local consumption due to an inability to travel.

Even so, as each data point is released, Hand says he has been pleasantly surprised, whether it’s business confidence, consumer confidence, house prices, unemployment figures lower than expected, and even talk of a strong volume of applications from overseas students to study at local universities.

That’s despite the still-unresolved challenge of actually getting to Australia in the first place.

Twitter: @Gluyasr