Tech evolution determines big banks’ future value

The Australian

By Robert Gottleibsen

The banking industry is set for another transformation. This one is akin to moving the propulsion of cars from petrol to electricity.

Accordingly the way markets evaluate and price, bank shares is set for a similar revolution.

For countless decades bank analysts have developed great skills in determining the values and prospects of Australia’s leading banks. Small investors have developed their own set of criteria.

And over the long term all have won as bank profits and dividends grew strongly. But to prosper in the next five years banks will have to become technology companies so analysing bank shares will require a deep knowledge of the relative bank technologies plus of their impact on the bank customer base.

The first whiff of this new era came when the ANZ toyed with the idea of buying MYOB so they would get access to the incredible data streams generated in MYOB and could us the technology to help their own clients.

This week at the trans-Tasman Business Circle NAB’s Business banking chief Andrew Irvine and Chief Digital, Data and Analytics Officer Angela Mentis gave Australia a sneak preview of the way they see technology transforming their business.

To illustrate future banking NAB aims to help farmers reduce their carbon emissions and to help businesses and households make the right capacity decisions on their rooftop solar panels. These sort of services will be bread and butter for data driven banks.

Right now, trades people and those in markets have to carry instruments or “dongles” to enable them to accept payments from credit cards and other forms of electronic payment. NAB announced at the conference that their technology will eliminate the need for “dongles” and instead the invoices will be processed by customers tapping on the retailer or tradesperson’s mobile phone.

But a data-driven bank goes much further.

Analysts love banks to lend on the security of property and accordingly they delighted in the housing mortgage boom. All Australian banks did well but no one performed better than the Commonwealth Bank as they flooded Australia with mortgages.

The housing loan legacy business will remain a strong earner because households will pay their mortgage ahead of almost every other bill, but it will be a long while before anything like the recent growth of new mortgage loans is repeated.

Higher interest rates have slashed the amount banks will lend on houses and there will need to be either big falls in interest rates and/or house prices to restore the equation.

When it comes to family business loans, again the analysts discourage cash flow lending and want banks to continue loan on the security of houses or business property. But all the banks know that the future of family business lending is based on the security of data and cash flow.

And to undertake that sort of lending every bank will need to have access to all the data of a business.

Australia’s fast payment laws make cash flow lending possible but our current horrific unfair contracts and the deep uncertainty in tax matters are an obstacle.

Meanwhile, if clients are willing, NAB plans to prepare GST statements and other statutory requirements. But, most importantly bank loans secured on data rather than property will require the data driven bank is to alert the business that there has been a surprise change (up or down) which may require action.

In other words, the banks will use their massive systems capacity to collect and undertake analysis of data in a way that no family business could afford to do.

To transform the data alert into business response, the modern bank will also need skilled family business staff that know how to relate to family business customers. Not surprisingly, salaries of such people are rising rapidly. Family businesses banking with more than one bank may have to make choices. The old banking tradition of pay up or we sell you up goes out the window in a bank that is driven by data and customer relationship.

Meanwhile the Optus data leakage will almost certainly trigger regulations that will restrict use and storage of data without the permission of the customer – whether they be an individual or an enterprise.

Customers that restrict the use of their data will operate their banking accounts in a way that is much more akin to current banking but those that give permission to share their data with the bank, with restrictions on its use outside the bank, will enter this new world.

Successful banks will need to transform the current distrust of banks into a relationship of trust. Banks will be differentiated partly on the basis on their ability to succeed in the very difficult task of converting distrust of banks to trust.

Accordingly, trust, along with levels of technology excellence will determine the profitability and therefore the share prices of banks. Some will succeed and some will fail but all with try because this is the new world.

DataFuturefuture bankingpayments