The Big Four have had it too good for too long.
And it’s been at the expense of the little guy.
It’s likely you do your banking with one of the Big Four. As consumers we have very little choice.
The best rates and deals are with the Big Four. No one wants to pay 7% interest to a second-tier lender. We all want a nice low 3–4% interest rate.
But going with the Big Four can sometimes get you into trouble.
What do you think the Banking Royal Commission was all about? The Big Four lie, cheat and steal from their customers.
And it’s because they don’t really care about you. You’re a small fish.
What the Big Four really like are large corporations. They need to borrow hundreds of millions, representing massive commissions and a whole lot of interest payments.
Could this all change? Could we soon see our banking system decentralised?
There is a new sort of bank moving in from the East. They’ve got more than a billion potential clients to draw upon in China. And they’re looking to make the same kind of impact down under.
Could banking become an app?
We all know what an app is.
But the explosive growth of apps is something few really talk about.
As we’ve all bought smartphones by the billions, the hundreds of apps living in these devices have become a market of their own.
The average smartphone houses about 80 apps, half of which users use regularly. The time we spend on these apps is also increasing.
Source: App Annie
It’s why so many investors love Hong Kong-listed Tencent Holdings Ltd [HKG:0700]. They own probably the greatest app in the world: WeChat.
Chinese users can do almost anything on this app. Business Insider explains:
‘WeChat users can do just about anything, including play games, send money to people, make video calls, order food, read the news, book a doctor appointment, and more. It’s basically China’s version of Facebook.’
While some refer to WeChat as the Facebook, Inc. [NASDAQ:FB] of China, you can see it’s so much more than a social network.
Source: Part Community
The social part is their foundation. And on top they’ve built everything else, even a bank.
And that bank is coming down under. The Australian Financial Review (AFR) writes:
‘Australian banks have a new reason to look over their shoulders as Chinese digital-only bank WeBank moves ahead with plans to establish a foothold Down Under.
‘WeBank, which is valued at $US21 billion ($29.4 billion) and has written more than 100 million loans in its first five years in business, quietly began laying the foundations for its digital-only banking venture with a flurry of trademark applications on December 5 last year.
‘…Last year WeBank’s microloans ranged between $US150 and $US30,000 with an average loan size of $US3000.
‘…The ACCC has called out the major players for “synchronised pricing behaviour” on several occasions, with chairman Rod Sims saying more needed to be done to encourage smaller banks and to potentially review regulation which gave larger banks a competitive advantage.’
Is WeChat the answer to break up the Big Four?
Maybe. But it’s highly doubtful.
First off, WeBank is a microlender. Aussies aren’t going to go to WeBank to get a home loan or borrow to buy that new Mercedes-Benz.
That doesn’t mean they won’t eventually, though. WeBank does lend out a whole lot more in China. In 2015 for example, the online bank was offering commercial loans to micro and small businesses.
But it could take WeBank a whole lot of time to scale up from a microlender to compete with the Big Four.
The second roadblock for WeBank might be regulatory. The AFR continues:
‘Companies are prevented from promoting themselves using the word “bank” under sections 66 and 66A of the Banking Act of 1959 unless they are an authorised deposit taking institution or have permission from APRA.’
Yet this also doesn’t mean WeBank is doomed to fail at the hands of regulation. Online banks like Volt and Xinja have been able to get restricted Aussie banking licenses.
Why not WeBank too?
But the real stopper will be scale.
The Big Four will have no reason to worry about WeBank because they have scale and WeBank doesn’t.
Let me explain…
What the Big Four have that WeBank doesn’t…
WeBank won’t be the big five of our banking system.
And it’s because they just don’t have scale.
Assume for a second that you want to get a loan. You already have your home loan with NAB, but you need a loan for private school fees.
Your decision is between WeBank and NAB…
Who do you pick?
Clearly you want the loan with the lowest rate and the highest flexibility. And assume WeBank is offering the best of both…
You tell your bank manager at NAB you’re going with WeBank. He asks why, and you tell him.
You know what he’s going to say?
If you’re a good client, if you make your repayments on-time and you’ve got an amazing credit score, your bank manager is going to match whatever WeBank is offering.
You’re happy because you don’t need to do any extra paper work to get the loan with NAB, so WeBank loses your business.
BUT…if you are a terrible client and you’re always late with payments, your bank manager will be more than happy to let you go with WeBank.
He might even tell you to refinance your mortgage with them too.
This is the advantage the Big Four have. They have scale of knowledge. They know if you’re a good or bad customer. And depending upon which one you are they’ll be happy to keep or get rid of you.
It’s highly unlikely WeBank will be able to gain that scale any times soon. So, they’ll always be competition at a competitive disadvantage to the Big Four.
WeBank has only become so successful in China because they already have that scale in information. Celent explains:
‘TDBANK, WeBank’s big data system, has 40 trillion records about retail customers. The data include online activities, virtual assets, payment behavior, purchase activities, social network information, public credit information, chat content, friends, etc. Use of this data allows WeBank to provide new banking services, such as a virtual mortgage.’
So, if you’re holding your breath, wondering if this new upstart will topple the banks, don’t bother.
We do need smaller local banks. We need less dependence on the Big Four.
But I don’t believe a small online bank is going to help.
Editor, Money Morning
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