Fintech is coming…
And the banks are in big trouble.
Especially Australia’s big four.
I’m going to put some facts on the table. Then I’ll explain why the big four Aussie banks might have already lost the fintech war to come.
But first, let me briefly recount Kodak’s tale of woe, and explain why it’s so relevant today.
You see, it all stemmed from one moment. The invention of the digital camera. And what’s worse, they invented it!
Founded in 1878, Eastman Kodak [NASDAQ:KODK] was once a global technology powerhouse. Big, dominant, unassailable. The Apple Corp. [NASDAQ:AAPL] of its day.
It had retail film developing locations all over the world, and employed over 145,000 people.
Like me, you might remember the old days of taking photos on holiday, then taking the film to get developed when you got home.
The results were often surprising. My Nana always managed to cut the head off my Dad, her son-in-law. No one was ever sure if it was deliberate or not…
Anyway, with the benefits of digital clear, the Japanese companies took over the camera revolution. This spelled the end for Kodak as we knew it.
It still exists today, but is a shadow of its former self, and was even in Chapter 11 bankruptcy in 2012.
Why didn’t Kodak just switch to selling the very product they invented, digital cameras?
It seems easy in hindsight, but you have to remember this: they made fat profits from the old way of doing things.
They had thousands of branches around the world making regular profits from the development of film. They owned 90% of the film market.
What CEO in their right mind would be brave enough to turn off that lucrative tap?
By the time Kodak realised the digital camera revolution was happening with or without them (and they were losing film sales rapidly), it was too late to change course.
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They’d lost the upper hand.
Which brings me to the banking industry.
Let’s look at some undeniable facts…
Ripe for the pickings
Australia’s big banks are the most profitable in the world.
As a share of GDP (the total value of goods and services produced in an economy), they make up 2.9% of the entire Australia economy.
This is the highest figure in the world.
For a comparison, the US’ banking industry, home of the Wall Street giants, is only 1.2% of the US economy.
This isn’t a good thing for the rest of us. As Executive Director of the Australian Institute, Ben Quist said:
‘Excessive profits provide a drag on the economy and hurt consumers who pay higher margins on bank products.
‘The reserve bank found the big four banks enjoy an implicit government subsidy worth almost $4 billion dollars a year.
‘These super high profits combined with this taxpayer subsidy means extra scrutiny and potential additional regulation on the banks is not only warranted but required,’
Like it or not, banks are a subsidised monopoly.
And here’s another fact.
These highly profitable banks are amongst the most hated businesses in Australia.
The waves of scandals at the Commonwealth Bank [ASX:CBA] point to why this might be the case. From financial planning to insurance, and now money laundering.
It’s no wonder two thirds of the population support a Royal Commission. A fact Labour are willing to exploit for political gain.
But despite all this, most people don’t actually do anything about it. People are more likely to switch partners than switch banks. So, the banks continue to churn out the profits regardless.
Why is this?
It turns out that as a group we don’t behave rationally. A branch of economics called behavioural economics has studied it.
Simply put, the research suggests most of us don’t switch banks because we have devoted time and energy to setting up bank accounts and loans with one bank. And we value this effort.
It’s called a ‘sunk cost’ bias.
It’s the reason why you are more likely to buy a product at a store if you leave a deposit. Even if — and this is hard to believe, but the research shows it — you find the same item for sale at 75% of the price elsewhere.
Even if you end up paying the same or more, people still tend to stick with the ‘sunk cost’.
To move banks, you would have to re-invest time and energy into new research. And there’s a tonne of information to get your head around. As well as purposely mundane and confusing administrative procedures.
The sunk cost is therefore highly valued.
So we stay put.
But financial technology is looking to make the process of comparing and switching banks vastly easier.
Financial technology is the future
In the UK, the government has already implemented an Open Data policy. This way, customers can compare existing accounts against competitor’s products through independent, third party apps.
To be clear, the UK government mandated that banks had to provide this information if the user requested it. They didn’t want to.
This data revolution is key to promoting banking competition, and is in the works in Australia. It doesn’t just make the process of switching easy. It also makes the process of comparing providers easy before the switch.
This is a crucial step in overcoming the sunk cost bias that makes bank customers sticky.
Open data is a key development in opening up bank competition.
But there’s one technology that might make banking as we know it redundant.
That’s the blockchain.
Without going into the complexities, cryptocurrencies like bitcoin have opened up a completely new way of owning and transferring assets.
The key difference is they are decentralised.
In other words, you don’t need a trusted third party in between each transaction.
And what is the most basic function of a bank? It’s just a place you trust to store digital assets like money. And transfer them to others.
Open data and decentralised blockchains are massive bank disrupters. And they are quickly gaining mainstream interest.
Can the banks fight back?
In the short term, they can probably slow things down. But in the long term I don’t think so.
You see, banks aren’t tech companies.
It’s not in their DNA, despite the odd showy tech announcement. You only have to look at CBA’s disastrous ‘smart’ deposit system to prove that.
The banks do have one big advantage though. Regulatory and political strength.
And I’m not saying that’s not a hefty advantage. It clearly is. But as Uber have shown, it means nothing if the public get behind a new solution.
Right now, banks make their profits from high transfer fees, good margins on loans and branches to stream customers to sell to.
Like Kodak, they can’t back a system that does away with these. Even if it means they lose, long term.
Short term incentives mean boards and CEOs will try to delay the changes and create political difficulties. But ultimately, if the new solutions are better, then the banks are in trouble.
Cryptocurrencies, blockchain technology, open data, peer to peer lending, insure-tech and a whole host of other developments are coming to consumers like you soon.
They’re cheaper, more flexible, and make the process of researching and switching 100 times easier.
They might even do away with banking as we know it…
Editor, Money Morning
PS: Blockchain technology, enabled by cryptocurrencies, is a huge part of the future financial system. And the possibilities will blow you away. You need to start learning about this. Read more here.