Commonwealth Bank’s Spring Clean Is Just the Start

Yesterday, the Commonwealth Bank [ASX:CBA] announced plans to sell off its life insurance business to AIA.

As well as the intention to sell of part of its wealth management business.

The bank also announced the departure of the wealth management head, Annabelle Spring. Following on from the announcement of the CEO, Ian Narev’s departure earlier this month…

I think that’s everything?

That’s a hefty number of big announcements for any business in one month. Never mind one as big and ‘stable’ as a bank.

So why now? Why the urgency?

I mean, in August the bank announced record $9.93 billion profit in August.

Shouldn’t the champagne corks still be popping?

Perhaps it’s just a spring clean. A chance to cut loose some deadwood around two scandal-plagued business units. Perhaps the board have decided it’s time for some fresh ideas in the executive?

Or perhaps it’s a sign that a deeper level of change is underway.

Now I’ve been banging on about the looming fintech threat to the banks quite a bit recently. Especially to the big four.

But to be clear, fintech doesn’t just mean two people quaintly banging out some code, in a hipster style co-working space.

It means Apple. It means Google. It means Facebook. As well as Chinese giants, WePay and AliPay. And a whole host of new technologies and well-funded startups, thanks to the recent ICO (Initial Coin Offering) boom.

Last week I stated that Open Data and blockchain technologies are set to expose the banks to increased competition across all aspects of their business. This would a squeeze on profit margins.

Insurance and wealth management are low hanging fruit for banks. They’re not core businesses. And they have caused a lot of reputational damage of late.

As a reader rightly pointed out recently, the bank’s main driver of profits is in lending. Specifically the right to lend out almost 10 times the amount they takes in as deposits.

These two announcements from the CBA could signal the beginnings of a retreat to this fortified castle. A castle they will try to defend at all costs.

I wouldn’t be surprised to see financial planning and stockbroking services begin to be sold off as well when a new CEO comes in. Like ANZ [ASX:ANZ] have already done with Etrade this year.

Because a new CEO is going to have to set a very new and radical strategic direction for the bank.

Which is why I am surprised these announcements are being made now. The usual course of action would be new CEO, then business review, and then strategic implementation.

Perhaps the board knows the need to transform the bank is more urgent than might appear from the outside?

But even I’m a bit shocked about the speed with which all this is starting to happen.

Funnily enough, it was actually an ‘old’ competitor that seems to be getting the fintech ball rolling.

Let the banking games begin

Macquarie Bank [ASX:MQG] announced last Friday that it is rolling out the Australian market’s first open banking platform. This platform allows its customers to securely move data to fintech start-ups and other technology companies.

Make no mistake, this is a monumental moment. And it weakens the position of the big four banks, who could previously rely on each other to slow down any moves like this until all their ducks were in order.

But the games are now starting, with or without them.

For Macquarie — which has a minuscule market share in home loans, credit cards and deposits — it’s a big strategic move.

It’s a direct effort to make a grab for the big four banks customers.

This is the plan…

Macquarie are essentially giving away their hold on customer data in the hope that it will attract more customers to the bank.

The new sales funnel will be people attracted to new fintech apps. Macquarie are essentially hitching their wagon to the fintech trend, and trying to use it as a way to give them opportunities to pitch to more customers.

This provides more opportunities to sell lending products.

They’ve got a lot less to lose by implementing this strategy than the big four would. And a lot more to gain, by way of improved opportunities to sell loans and credit products.

This is the perfect way to circumvent the previous wide-scale branch advantage that once mattered so much. Independent fintech apps could be the new branches of the future. And Macquarie is a clear first mover here.

Head of personal banking in Macquarie’s banking and financial services group, Ben Perham said:

We think this is the right thing to do for customers, we are providing it, and we are not waiting for regulators or the government to proscribe it.

We certainly believe the data is the customer’s data, and the customer should be able to use their data the way they want and they should be able to do so securely … We think it is the right direction and we are proceeding with it.

Aside from ANZ, the other banks have been reluctant to give an inch. The other three have strongly resisted even consumer favourites like Apple Pay, so far.

Crunch time approaches

It’s been a big week in banking.

The CBA announcements yesterday and Macquarie’s announcement earlier in the week are the first signs that banks have realised it’s not going to be business as usual over the next decade.

It will take a deft hand to navigate the coming fintech storm.

And although the big four banks in Australia are still very strong, history has shown that technological disruption can happen a lot faster than anyone thinks possible at the time.

What will banking look like in the next 10 years?

I can’t say for sure. But I can say it will look a lot different from today. And current bank executives will need to work out how they can maintain relevance and profitability in a vastly different banking world.

Good Investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia