Value the key to being one of Don Argus’s banking winners

Banking industry elder Don Argus has turned his attention to the likely winners and losers of industry disruption.

Banking veteran Don Argus.

After taking up the cudgels against local bank boards over the weekend for failing to understand product risks and the required level of technology support, banking industry elder Don Argus has turned his attention to the likely winners and losers of industry disruption.

Argus turned 80 earlier this month and a lot of water has flowed under the bridge since he retired as chief executive of National Australia Bank in 1999.

However, as a member of the Bank of America global advisory council, he has kept abreast of the fluid industry environment and BoA’s re-emergence after a near-death experience in the global financial crisis.

BoA has secured its future, he says, by segmenting its customer base, developing highly disciplined risk protocols, pricing for risk, investing in technology and initiatives to compete with the disrupters, and hiring appropriately accredited staff to help a growing customer base.

In other words, it’s concentrated on areas that have been ignored or overlooked by local equivalents.

In an opinion piece published in The Weekend Australian, Argus was scathing about the breakdown in sound risk management practices and the required level of technology support following the $18 billion plunge into wealth management in the late 1990s and early 2000s.

“In some instances, questions (can be) raised as to whether a risk framework actually exists,” he wrote.

“You have to wonder what happened to the internal audit process, the external audit obligations, the ombudsman’s role, the Australian Prudential Regulation Authority’s overview process and the Australian Securities & Investments Commission’s review process.”

But what of the future; a future of fragmented value chains, more intense competition and a new era of open banking where customers will be able to share access to their financial data with non-bank third parties through application programming interfaces?

APIs, in the new world, will enable third parties to integrate their services with a bank to create a better customer experience.

Argus believes there will be winners and losers.

Among the losers will be institutions that focus simply on harvesting their existing business franchises. They can expect a rapid erosion of their customer bases.

The winners will have an innate appreciation of their value chains and risks.

Argus believes banks that understand their value chains and have sound risk practices will withstand the creative destruction of their businesses.

He also says the erosion of boundaries between financial institutions and products invites a different regulatory approach based on products rather than institutions.

This will help ensure competition in product markets, distribution of the burden of cross-subsidies across the system and simplicity and coherence in regulatory structures.

Disruption will not occur against a comforting background of stability, Argus says.

Trade and currency wars, along with the reputational risk associated with misconduct issues surfacing in the financial services royal commission, could hinder the ability of institutions to successfully adapt.

“When banks falter, so do countries, as the contagion effect can escalate quickly,” the ex-NAB banker says.

“If banks stop lending for any reason, companies get starved of capital, job creation wanes, economic growth stalls, and recovery becomes a distant projection.

“I suspect the banks that understand product value chains, have a strong risk framework and engage their accredited workforces in thinking about outcomes will thrive in the new world of digital technology and artificial intelligence.”

Word on the street

Post mortems are now under way after National Australia Bank’s brutal two-week encounter with Ken Hayne’s financial services royal commission in its superannuation round of hearings.

The word on the street, which is more speculative than anything else, is that chief executive Andrew Thorburn rattled Hayne’s cage on Thursday, August 9 — inviting the next day’s retaliatory summons to wealth boss Andrew Hagger — by hosing down the prospect of criminal charges against NAB staff.

The NAB chief said the bank did not believe it had committed criminal acts, despite Hayne asking one of its witnesses if she thought that “taking money to which there was no entitlement raised a question of the criminal law”.

There was also evidence that NAB repeatedly blew through the 10-day deadline to file significant breach reports.

The upshot was that Hagger, one of the few witnesses to be summonsed by name, had only a weekend to prepare for a gruelling round of questioning by senior counsel assisting, Michael Hodge.

For many of NAB’s rivals, it illustrated the madness of trying to “spin Hayne”.

Far better to let things take their natural course.

While the timeline stacks up, the theory doesn’t ring true.

First, Hayne has often expressed frustration with witnesses who are unable to answer questions because they lack seniority.

And second, when the commission finished with NAB witnesses Paul Carter and Nicole Smith, which was well before Thorburn’s intervention, counsel assisting flagged that the case study was still open.

The clear intention was to hear from another NAB witness, most likely Hagger, because of his ASIC connection.

That said, spinning or reinterpreting Hayne is not a recommended course of action.

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