Australia’s banks facing a revolution

Internet banking has already made many branches uneconomic and a lowering of housing loan margins will make them even more vulnerable. Picture: Hollie Adams

Australian banks are learning the hard way the long-term cost of losing control of their distribution system.

I don’t believe either the banks or the community fully appreciate the significance of this fundamental change in the Australian banking system and the future of branches in local shopping centres and rural communities.

The headlines spruik the Australian Competition and Consumer Commission’s desire for yet another banking inquiry --- this time over the fact that new home borrowers receive better mortgage rates than existing customers. It’s called a loyalty tax.

I will talk about the madness of a new inquiry later but first let’s look at what’s causing banks to slash mortgage rates for new borrowers and the long-term warning this signals to bank shareholders.

And those warning signals coincide with a warning from ME Bank that the credit card profit bonanza is coming to an end.

The Hayne royal commission wanted to curb the role of mortgage brokers in the home mortgage chain, but they were too late. These days, according to UBS, less than 40 per cent of new home mortgages are generated via banks themselves and over 60 per cent are generated by brokers and other sources. The banks simply don’t have the capacity to generate a majority of their own loans.

Brokers can offer mortgage loans to customers from both banks and non-banks with the non-banks charging more but not requiring the same personal affairs interrogation. The brokers who do their job have the banks at a great disadvantage so to gain loans banks, according to Macquarie, are slashing the interest rates to new loan customers by half a per cent over existing loans. The ACCC describes this as a loyalty tax on existing loan customers, but it’s actually the cost of no longer controlling your market.

The word will rapidly spread among existing bank customers that they must renegotiate their loans every time there is a rate cut.

We are looking at a broker bonanza as they churn loans every two or so years and gain commissions. The simple situation is that half a per cent is too big a gap and over time the banks are going to lose that margin between old and new loans.

If the banks play hard ball on account swapping, in time there will be regulatory interference.

We have seen this in the electricity industry and power retailers’ profits have been slashed by regulatory interference. They are responding by rapidly reducing their costs.

The half per cent gap in time will be reduced via market forces or regulation and like power retailers, banks will respond with massive branch closures, causing them to lose even more loan-generating power and relegating them to a commodity producer in the mortgage space.

Despite the cost-cutting this will be a threat to bank profits.

Meanwhile the last thing we need is another inquiry. There is widespread change coming as a result of the Hayne commission that needs to be introduced and assessed before any new inquiry.

On the credit card front the industry funds’ ME Bank was planning a major thrust into credit cards but has halted its plans because “buy now pay later” schemes such as Afterpay are decimating the credit card market. ME Bank was not a major credit card player and writing off development expenditure was a minor matter. But for banks, credit card cards are an important source of profits which is set to be reduced.

A large number of local strip shopping centres and rural communities depend on a bank presence.

Internet banking has already made many branches uneconomic and a lowering of housing loan margins will make them even more vulnerable.

Strip shopping centres and rural commodities are going to be required to unite behind their branches if they are to retain them.

The banks had planned to convert their branches into financial advice centres. One of the results of the Hayne commission has been to cause banks to exit the personal financial planning market and with that the long-term plan to rejuvenate branches.

What will happen is that the fee boom heading brokers’ way will cause them to open more branches to gain a customer presence -- that’s the function they served for banks.

It’s ironic that the drive by the big institutions and superannuation funds over the last two decades to get banks to make more money looks like leaving them as low-margin, highly-regulated commodity producers in the mortgage space.

The banks’ old position will be occupied by brokers and non-banks. In due course there will be pressure to extend greater regulation to these areas but they are set to become vital to housing, so it may not happen quickly.

The banks that will prosper in this environment will be those that harness the new technologies to lend to small and medium business.

The best placed to do this is the NAB and the success or failure of the new CEO, Ross McEwan, will depend on whether he can grasp the opportunity.