A Cashless Society Benefits Banks More than Ever

The Big Four are too powerful.

They’re too large. They have too many advantages.

It would be fine if these advantages occurred naturally. But they didn’t.

The Big Four have unfair advantages over the rest. And it’s thanks to the ever-dutiful regulators.

One advantage, for example is the Big Four’s ability to self-assess risky loans.

Not all loans are the same, of course.

A mortgage with a 20% deposit down is far safer than a business loan with little to no collateral down.

Yet, the Big Four have the ability to make their own judgement. They have more information than smaller banks, regulators say.

That’s why they’re given this advantage to self-assess over all other banks.

What this does is keep the big banks big and the small ones small. Small banks can’t match big bank rates, as they can’t self-assess risk.

It keeps the scale in the Big Four, which tend to abuse their power over consumers and leaves the small banks fighting over the riskiest borrowers.

Thank goodness lenders from the East are moving in to punish the Big Four…

Free report: Aussie stock picker, Sam Volkering (with gains as high as 1,431% in the last 18 months) reveals what he believes are his next four big potential winners.

These are no conquerors…

You might have heard the name Alibaba Group Holding Ltd [NYSE:BABA] before.

They’re a Chinese business similar to Amazon in that they do almost everything. E-commerce, cloud storage, shipping, lending, healthcare, advertising…you get the point.

One of Alibaba’s most successful ventures has been Ant Financial and Alipay. The former is Alibaba’s financial arm, in which Ant offers services like loans, insurance and money management.

Alipay is their payment system. And it is colossal.

The Australian Financial Review (AFR) explains:

Alipay has 870 million users in China. 

‘…Ant Financial has recently expanded into India via the acquisition of Paytm, India’s largest mobile payments processor. “Our view is to connect the wallets up at some point in time. What that means is, in 12 months’ time, I could be talking about a Chinese and Indian guest in market as well,” Mr Lawson [Alipay’s country manager for Australia and NZ] told an investor group.

Thank goodness Alipay has recently decided to come down under.

They’ve been extremely successful in China. Now they’re in Oz to tackle the Big Four and topple our highly concentrated banking system.

That’s what I was hoping to hear at least…

Again, from the AFR (my emphasis):

Chinese payments juggernaut Alipay says it is targeting three billion customers as it expands into India and will become a major source of referrals to Australian retailers, but it has no plans to tackle the major banks given its app will not be rolled out to Australian customers.

It said the proportion of those billions who visited Australia would look to use the app to pay here, so retailers needed to have it enabled (directly or via their bank) to get the sales.

No, Alipay won’t save us.

Neither will their largest competitor, Tencent’s WeChat, which runs the lending arm WeBank. Here’s something I wrote earlier this year:

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 work “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.

The scale of the Big Four is basically secure. That’s as long as they have their unfair self-assessing advantage.

Rather than toppling the Big Four, cashless companies like Alipay and WeBank might only make them more powerful.

Here’s how…

It’s not YOUR money!

The bitcoin bulls had it right.

Not about bitcoin, but about how money might look in the future.

It won’t be coins and bank notes.

It’ll all be digital. All you need is your credit card really. Some are even off that and now just use their smartphone.

We’re all moving towards a cashless society. Alipay and WeBank were the big influencers for China to wean themselves off cash. The AFR explains:

Amid debate at this week’s Australian Financial Review Business Summit about whether the US or China was technologically superior, Mr Lawson’s presentation on Thursday suggested China was more sophisticated in payments than most Western economies.

“It’s coming to the point in China that if you walk into a store in China with cash, the merchants are looking at you and saying ‘what’s that?’,” he said.

“Just over the last two years, China really gathered speed in moving to a cashless society.”

It’s not hard to imagine Aussies will go the same way, with a helping push from Alipay and WeBank.

So, how does this make banks more powerful?

First let’s break some preconceived notions.

Do you really think the money in your bank account is yours? There might be numbers that you can see online. But this is not cash in a vault waiting for you.

This number represents a monetary figure the bank owes you.

You see, any time you give your money to the bank, it stops being your money and becomes the bank’s.

Why is it when banks go bust (it can happen) depositors don’t get their savings?

It’s because these are not savings. These are all really just loans.

Anytime you give your money to the bank, it is not a deposit. It’s actually a loan to the bank, hence why it is now theirs. And they can do whatever they want with it.

The only reason you loan out your hard-earned money to the bank is because you trust you’ll get it back (plus some interest of course).

Within a cashless society, we all lend even more money to the banks. And with more money, banks will likely create money to lend out even more.

Total debt in our economy will rise. A lot of this newly created debt will be lent for consumption, not value-added activities.

Boom bust cycles will become more frequent. And we’ll all wonder why everything got so erratic.

It’s because our cashless society gave the banks more power to create more money.

And because they have no guidance or incentives of where to push this money into the economy, a lot of it will get funnelled into financial assets and be used to speculate on the property market.

That’s how I see it all playing out anyway.

Your friend,

Harje Ronngard,
Editor, Money Morning

Free Guide: How to Buy and Sell Shares. Download now.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia