The All Powerful Big Four Banks Won’t Be the Biggest Forever

How does $100,000 go missing?

I recently chatted with a Baby Boomer who experienced this first hand. Her bank misplaced $100,000 in an account she couldn’t find.

Thankfully, after some prodding, admin sorted out the whole kerfuffle. I don’t have to tell you how distressed she must have felt.

It’s why she’s planning to take out her super early. She has it with one of those funds owned by the banks.

The way she sees it, that money is better off paying down debt on her assets than locked up with one of the Big Four Banks.

If we can get enough Aussies to do the same, then maybe ‘The Great Banking Carve Up’ will happen sooner than you think…

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The ‘New Banking Market’ is Still Growing Up

For the longest time, the Big Four banks have abused their power and gotten away with it.

Where else can you go?

The Big Four Banks have the best rates, they have a cost advantage and they can lend out the most money.

It’s all largely thanks to regulators, mind you.

APRA allows major banks, like ANZ, WBC, NAB or CBA to self-assess the riskiness of loans. They have many borrowers coming through the doors, they’ve got piles of data, why not let them use it to assess risk?

That’s the thinking behind it…

As a result, they can lend more and offer better rates compared to the smaller banks. A small or regional bank might apply an average risk weighting of 35% to their mortgages, for example.

Yet, this would still be 10% higher than the average for the Big Four banks.

The major banks ‘…can earn close to double their risk-adjusted cost of capital,’ Joseph Healy writes in his 2018 report, ‘The demise of SME Banking’…

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The unprecedented trust deficit in the banking industry has resulted from an abuse of that privileged position…[It’s] a banking system that has a bias to allocating scarce funding to the household sector because of capital risk weighting advantages which are fundamentally linked to remuneration incentives (even when that sector is already highly leveraged) and that has lost the skills to lend to the SME sector, builds up costs and risks that eventually will become apparent.

So, it’s no wonder why they own 80% of the residential mortgage market, and 85% of the investor home loan and business lending markets.

The Big Four’s days are numbered, though. I can smell it.

Maybe CBA, NAB, WBC and ANZ won’t go belly up. But I’ll wager they play a far smaller role in Aussie banking for the years to come.

One reason why is because their customer base (Baby Boomers) won’t be around forever. A lot of them are already fed up with the Big Four, willing to turn to any other reasonable alternative.

The new market for lending will be the Gen X’ers (who I always forget about) and the Millennials.

When’s the last time you saw a Millennial depositing cash in the bank, or applying for a credit card at your local branch?

They’re all using PayPal, Afterpay and in some cases, cryptocurrencies.

The Big Four Banks were not created for this new generation. And there might be a bunch of new opportunities spun out to service this up and coming market.

Aussie Banking Industry Will Get More Competitive

Changes are already beginning to happen.

More ‘alternative lenders’ are obtaining Aussie banking licences.

APRA has hinted at reducing the special treatment they extend to major banks and not the entire industry.

The Australian Financial Review reports:

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 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.

But Millennials are not stupid…I think. They’re not going to bank with some online neobank if they can get a far better interest rate with CBA.

Maybe it won’t be Armageddon for the Big Four…

Maybe it’ll just be the time they contract and focus on one line of business…residential mortgages maybe.

The rest of their business, corporate lending, personal loans, car loans, credit cards and alike might be divided up amongst hundreds of small, tech-enhanced digital banks.

This is one of the ‘Big Ideas’ my colleague Ryan Dinse is heading over at Exponential Stock Investor.

Here’s what he told subscribers last month…

…You don’t see change overnight. And it’s not a linear process.

Rather you see a series of small and not so small wins over a number of years…a gradual but powerful revolution over time. They happen all over the place in many different ways.

Until one day, you realise the world we’re living in is entirely different to the one we were living in before.

This, in my opinion, is exactly what’s happening to the banking industry.

If he’s right, there could be more than a few fintech opportunities right here on the ASX.

At the very least, I suspect the Aussie banking industry will get a whole lot more competitive, forcing banks to specialise to gain advantages in key niche markets.

If you’d like to check out a few more ideas Ryan has brewing, you can do so here.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Special 2019 report: The next generation of Aussie income super stars revealed. Hint: it’s not the banks. Click here to claim your copy 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.

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