Why Bendigo Bank Needs to Go Blockchain

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The Bendigo and Adelaide Bank Ltd [ASX:BEN] announced first half results yesterday.

And it was the same old story…

Rising costs, falling profits, and a cut to dividends to compound shareholder misery.

One big broker was quick to put the boot in…

Citigroup reaffirmed its ‘Sell’ recommendation with a note stating:

A messy result, with poor fee and cost trends mitigated by a strong NIM and record low bad debts. However, management has guided that the better than expected NIMs and BDDs (bad and doubtful debts) will reverse in 2H20.

The company used the results to also announce a $300 million capital raise to help meet regulatory requirements.

I don’t think Citi clients will be taking part in the raise somehow…

After all, why should Bendigo need to raise more money in such ‘good’ economic times?

The fact is, like their big bank counterparts, they’re a one-trick pony that’s overly reliant on residential mortgages.

And so, their only solution seems to be to raise more money, so they can in turn lend out more funds to fuel a never-ending property bubble.

That’s about as innovative as Australia’s banks get…

But it’s literally a house of cards.

And it shows what a flawed business model Australia’s banks — and perhaps the entire economy —is built upon.

In my opinion, if the Bank of Queenslands, the Suncorps, and the Bendigos of the world want to survive, they’re going to have to think radically different than this.

Regional USA points the way…

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The sprawling interior of the US continent is home to 5,000 regional banks and 30% of US’ banking assets.

It’s much bigger and more competitive than Australia’s banking scene.

And yet the problems and opportunities are the same as those facing Australia’s regional banks.

Namely: how to stay relevant in a world of fast-moving digital competition?

The answer for some American banks has been a left-field tech move.

Rather than trying to become tech companies themselves — which never works — they’ve started partnering with actual fintech innovators instead.

It’s turned out to be good for both parties.

As reported in CNBC last year:

These low-profile community banks quietly run the plumbing underneath billion-dollar fintech firms such as Square, Stripe and Robinhood — handling mundane banking activities for them like holding customer deposits and underwriting loans — while the tech firms remake finance for a digital age.

For some, it’s a match made in heaven.

These smaller banks, with names like Cross River, Celtic, Sutton Bank and Evolve, say they don’t care about having a household name so much as they need new lines of business as consumers increasingly switch to mobile banking.

And the fintech companies, adept at luring new customers at a low cost, need the blessing of federal regulators and someone else to handle the money.

A clear win-win.

This is the kind of thinking Australia’s second tier banks should be doing.

They need to actively help push the latest technological experiments in blockchain and decentralised finance that are forming the foundations of a new banking fabric.

The alternative is a slow death to irrelevance.

Because like it or not, technology is coming for their businesses.

And it’s only going to get crazier…

Then came quantum banking

Right now, we’re in stage one of a global banking shake-up.

It’s marked by smartphone banks and tech-led specialists targeting specific banking niches like insurance and wealth management.

Stage two will be the turn of cryptocurrencies and blockchain to rearrange the system’s plumbing. How money gets from point to point and who — if anyone — controls the flow.

That point is nearer than you think.

But then it gets even crazier…

In stage three, it’ll be the turn of quantum banking.

This is a complex and evolving field. But basically, it’ll mean using quantum computers to help manage risk and trading decisions.

Quantum computers can make complex calculations at lightning fast speed and such a future will save billions of dollars in processing costs.

It’s potentially so lucrative some big-name Wall Street banks are already experimenting with early prototypes.

As reported in Wired magazine recently:

In a step toward delivering on that promise, researchers affiliated with IBM and J.P. Morgan have recently figured out how to run a simplified risk calculation on an actual quantum computer.

But before this can all take off, quantum computers still need to be viable.

Everyday quantum computers that can work at stable room temperatures are still not possible. Most are still highly experimental.

There’s a missing piece of the quantum puzzle that needs to be solved before quantum computing can be a reality — for banks or anyone else.

Now get this…

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Make no mistake, the future of banking is going to be tech-driven.

Banks that can carve out a niche in this inevitable future need to start making big strategic changes now.

Those that don‘t are finished…

Good investing,

Ryan Dinse,
Editor, Money Morning

About Ryan Dinse

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…

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