Digital disruption has taken its toll on many industries, with music, media and retail companies taking numerous body blows as their markets go online.
And despite public perception and headlines that scream ‘record profits’, banks and financial institutions are under the pump to find solutions as well.
Australia’s big four banks (ANZ, NAB, Westpac and Commonwealth) saw their earnings eroded by 2.6 per cent in 2015-16, the first recorded slip since the global financial crisis of 2008.
There are a range of reasons why these profits are slipping, but digital disruption is absolutely a factor with nimble, online-only competitors emerging every year to carve off their slice of the pie.
Big banks stand against online competition under threat
Macquarie’s banking analysts have released research that things are likely to get worse before they get better for the Big Four. Their report predicts that they could have up to 30 per cent of their revenue ripped out of their coffers in the coming years.
But the big question is why now, and not 10 years ago when the other industries saw digital disruption becoming a major factor?
The answer is threefold, with more affordable IT, widespread cloud computing and the rise of the smartphone all biting hard in recent years.
The big banks still have their strengths, and will not go quietly into the night, the report notes.
“We expect the banks to be able to retain their dominance in areas where there are significant barriers to entry, such as accessing central exchange settlement, holding a banking licence and accessing liquidity from the RBA,” it reads.
But profits are still expected to dip sharply in the coming five years.
New expectations from consumers takes its toll
As innovations in fintech advance, customer expectations are shifting. A recent Blumberg Capital survey showed that not only do customers think banks are failing to deliver their needs, but 57 per cent of respondents believe the traditional bank will be extinct within their lifetime.
The primary reasons consumers are abandoning the traditional banks and going for online fintech options is because they feel they can have more power over their finances, access services they had previously felt locked out of and, ultimately, will be better off financially.
“Banks need to adapt, adopt or hasta la vista, baby,” Blumberg founder and managing partner David Blumberg says.
Regulatory pressure and its effect on the big banks
If digital disruption and an army of fintech competitors wasn’t enough for the banks to wear, it doesn’t help that they are mired in a mass of government red tape.
Ever since the global financial crisis, there has been widespread calls for regulatory reform in the banking sector.
A parliamentary banking review has become a political football between the government and the opposition, with both sides freely taking shots at the banks and pushing harder for greater regulation.
The big banks were forced to raise $18 million from shareholders in 2015 to meet regulations, and will have to rattle the tins again in the coming years.
What the banks are doing to combat these challenges
Artificial intelligence is expected to come into play in the coming years to help personalise the automation process. National Australia Bank is already using it through IBM’s Watson supercomputer in its online-only UBank division.
Banks are also taking the fight all the way to Silicon Valley to develop innovation solutions, and ANZ recently poached Google Australia boss Maile Carnegie in a clear sign they are taking the digital fight seriously.
Ultimately, it will be the consumers that are likely to win; because it is much easier to strengthen a strong banking sector, than a weak one.