Can You Afford to Ignore This? – Fintech Investments and The Big Banks

First up…

Did you see Change Financial Ltd [ASX:CCA] yesterday?!

Its share price rose a massive 292% on the back of the launch of its new payments processing platform.

To be honest, I think the market may have got a bit carried away with the mention of the word ‘Mastercard’ in the announcement. So be careful here.

But it just shows you how hot the fintech space is right now…

Download now: Three ASX fintech stocks taking on the banks (and winning)

You might’ve also seen how Afterpay Touch Group Ltd [ASX:APT] hit new all-time highs last week too.

In just over two years the share price of the fintech darling has risen from $2.65 to as high as $37.12.

It’s a great story and one I’ve been following closely.

I wrote on 26 June — under the title ‘Is it too late to buy Afterpay?’ — when shares were trading for a ‘measly’ $27…

You might be thinking this is an old story. The stock has flown up and has made early investors 10 times their money over the past three years.

But I still think it’s worth considering today…

I then went on to explain how the banking world is still changing rapidly and Afterpay represented the vanguard of a new breed of banking product.

Niche, tech-driven and with an appeal to the increasingly valuable millennial generation.

Afterpay isn’t just a flash in the pan though.

It’s the canary in the coalmine for the entire banking industry.

Now before I blow my trumpet too hard on this, I’ll also point out in the same article I also mentioned how much I love Bitcoin [BTC], which has fallen sharply since then.

And yet I remain convinced on both fronts.

Fintech, cryptocurrencies, blockchain, big data, millennials…it’s a collision point of monumental proportions.

The big question for you is — who will survive, who will thrive and who will fade into oblivion? There are some interesting clues on this front already…

Commbank might bust the budget!

I remain sceptical of the ability of big banks to adjust to this new paradigm.

Mainly because I’ve worked for them and know how slow the wheels of banking innovation turn in bank land.

But you can’t deny they’re still in the box seat.

And sometimes a big bank can pleasantly surprise you.

Take the Commonwealth Bank of Australia [ASX:CBA] for instance…

They’ve just revealed a new update to their mobile phone app which is actually a little bit genius.

Called ‘Benefits finder’, the new feature uses data feeds to find government benefits you’re entitled to, but may not be receiving.

This is the kind of innovation that could save the banks.

After all, navigating Australia’s complex benefits system is a bit of a nightmare.

But while good news for CBA customers, it’s very bad news for treasurer Josh Frydenberg and his attempt to get the budget back into surplus.

You see, the feature might cost the government a whopping $10 billion a year! This is unclaimed money that people don’t know they should be getting.

As reported in IT news:

While the CBA revealed the data-driven benefit hunting feature in its app relaunch in July, the calculation of the new $10 billion estimate on unclaimed money is highly significant because it makes the mechanism a hard cash reality for customers and prospects.

However, the automated “Benefits finder”, as CBA calls it, is a potential nightmare for some parts of government, which have for decades unofficially banked on low take-up and claim rates across various rebate and concession schemes.

Like I said at the start…this is a collision point which will create unexpected winners and losers in equal measure.

But aside from this rare glimmer of innovation from the CBA, there are signs the fintech revolution is starting to bite into the big banks’ profits…

Westpac to cut dividend?

From the Digital Finance Analytics blog:

In a research note published on Wednesday (25 September), Morningstar analyst Nathan Zaia forecast Westpac’s 2020 dividend will be reduced by 12 per cent to $1.66 from $1.88. 

The analyst believes that the bank may struggle to meet its January 2020 capital deadline. 

“When Westpac reported first-half earnings in May, the bank appeared in good shape to meet APRA’s 10.5 per cent unquestionably strong target by January 2020,” Mr Zaia said. 

“However, we estimate capital headwinds, new and previously known, will detract around 44 basis points from Westpac’s common equity Tier 1 ratio by December 2019.”

The key line in there is ‘capital headwinds’.

That’s non-operational expenses.

The immediate capital headwinds for Westpac mentioned above are remediation payments — compensation — due to customers as part of the fallout from the recent Banking Royal Commission.

The regulator APRA has also asked the banks to hold more capital in reserve, which means they need to hold onto more cash.

Ipso facto, less available to be paid to shareholders. 12% less if the analysis is right.

But I think this is just the start of even more ‘capital headwinds’ to come…

It’s a tech arms race you need to be in

There’s no question the big banks will have to divert an increasing amount of money to technology over the next couple of years.

And this will put further pressure on their dividend policies.

With two neo-banks launching in Australia this month, competition is heating up, especially when it comes to technology.

They can’t just sit back and ignore it or they will die a slow death as younger customers move en masse to the smartphone-only banks.

It’ll be interesting to see how the big banks respond to this threat. As well as the traction these new neo banks get with Australia’s banking customers.

I’ll be watching both sides of this story closely for you.

But if the Afterpay story has taught us anything, it’s that the investing opportunities are huge in this area if you get on the right companies early.

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Dividend disaster! Find out why bank dividends could be under serious threat. Download your free report now. 


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.  


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