The Banking Apocalypse Is Coming

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Look at this…

Money Morning

Source: Afterpay Touch Group
[Click to open new window]

What does that graph tell you?

It tells you people are finally learning.

While a credit card can be useful when used properly, most Aussies don’t have a good relationship with money. So they’re better off opting for a debit card instead.

This is wonderful news for companies like Afterpay Touch Group Ltd [ASX:APT]. It’s not so great for banks though.

Credit cards are a billion-dollar business for them.

And they’re slowly losing that market as Millennials opt for debit cards, buy now, pay later platforms, and other means of credit.

But like an octopus, this is just one of the many arms banks use to put us all further in debt.

Yet who knows, maybe we’ll see these slow stalwart banks lose far more than credit cards in the near future…

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The Big Four brought down by Millennials

Yesterday, I spoke about retail and how that industry could change as tech savvy Millennials come to dominate the market.

Well, it might be the same for banking.

After all, who goes into the bank these days?

I’m sure you might. I do too, occasionally.

But I’m usually there to fix a problem caused by the bank. And I’ll have a terrible experience fixing it up.

If you are a branch regular, though, take a moment to look around next time.

Are there many Millennials there depositing money, applying for credit cards and loans?

What do you think’s going to happen when a completely new generation, one that didn’t grow up going into the bank, comes of age?

They probably won’t be going to banks for credit cards, financial advice or business loans.

Those kinds of services are going to the nimbler fintechs.

Speaking of which…

The newest Aussie challenger bank has arrived.

While Afterpay and their rivals are carving out the credit card business, Judo Bank wants to carve out business lending from the Big Four too.

An octopus with no arms…

Judo just got their banking licence in April.

And while most challenger banks target the $250,000 loan market, these guys are going after the Big Four’s lunch.

They want to steal market share from the $10 million-plus business loan market.

And they’re going to use technology to do it. Cited by CIO, Judo co-founder Alex Twigg said:

The tech strategy has always been that we would be a completely cloud-based organisation. We would also take a completely software-as-a-service model approach to our technology strategy so that we don’t own a single server and we don’t employ a single developer…Everything we do is bolted together as a software-as-a-service.

Why is this important? Well, because banks actually need a whole lot of data. Credit data, to be specific.

The more data they have on a certain type of customer, the better the risk probabilities they can feed into their models.

And with more accurate models, they can offer the rock-bottom rate, while still remaining profitable.

Everything we’ve done has been designed around that ‘data differential’ and being made for change,’ Twiggy added.

Therefore, we’ve designed with an AI future in mind. We capture absolutely every piece of data that goes through our system. Our bankers have one system to use which takes them from CRM all the way through loan settlement — and everything in between.

Yet even if smaller fintechs take away the octopus’ (Big Four) business arm, that still leaves them with one more arm, which is arguably their biggest: mortgages.

The Big Four control something like 80% of the mortgage market. And with that they’ll continue to offer the best rates, you say. Borrowers will have no other options…

Maybe that’s the case.

The only reason my wife and I are still with one of the Big Four is because of that fact.

But in time, that could change too.

The advantage big banks have long had over their smaller competitors is about to be lifted by the banking regulator, APRA.

The Australian Financial Review writes:

The big four banks will face stronger competition from second-tier banks, which will be able to offer cheaper home loans and sharper deposit rates when the regulator moves to even the playing field for banks in the weeks ahead.

The Australian Prudential Regulation Authority [APRA] is expected to reduce the relatively high risk weighting applied to mortgages issued by smaller banks that determines how much capital they are required to hold to support their lending. That would narrow a key 10 percentage point regulatory advantage that allows the big banks to hold less capital.

…The decision around risk weightings will be the first of three announcements rolled out by the prudential regulator over the next six weeks. The remaining two will concern loss absorbing capital buffers for big banks and a proposal to put a cap on financial incentives for executive pay.

The changes to risk weightings will shrink the gaps between the big and small banks and will take any discussion about the weightings impeding competition off the table.

Could this be the beginning of the end?

The end of big banking?

And a new beginning of small, tech-enhanced lenders that Millennials want?

Your friend,

Harje Ronngard,
Editor, Money Morning

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