Australia’s Big Four banks risk losing AUS$13 billion as barriers to entry fall

Rick Steves

A research study by consulting firm Frost & Sullivan came to the conclusion that the traditional banking industry in Australia is on its way to lose AUS$13 billion in aggregated revenues by 2020, as FinTech players get more adoption in the market as they better meet customers’ needs and practice lower fees. AUS$10 billion is […]

Australia’s Big Four banks risk losing AUS$13 billion

A research study by consulting firm Frost & Sullivan came to the conclusion that the traditional banking industry in Australia is on its way to lose AUS$13 billion in aggregated revenues by 2020, as FinTech players get more adoption in the market as they better meet customers’ needs and practice lower fees.

AUS$10 billion is the estimated revenue taken away from the big banks, and AUS$3 billion is new revenue accomplished by the FinTech market, while new added value to the economy by stands at AUS$1 billion. The consulting firm calls for the Big Four banks to react and minize the dent in future profit growth.

Audrey William, Head of Research, ICT Practice, Frost & Sullivan Australia & New Zealand said:  “This disruption should be of serious concern to the Australian financial services sector. While Fintech will not end traditional financial services, Australian Fintech is in the development stage of the business cycle and already the Fintech start-up space has grown rapidly in Australia.”

Among the major banks, Westpac Banking Corporation (WBC) is leading the innovation department: “WBC opened an innovation lab in September 2014 and has already invested AUD50 million in companies throughout the Fintech sector, with blockchain trials and mobile payments through its partnership with Android Pay to begin in 2016”, said research analyst Saranga Sudarshan, adding that the Commonwealth Bank of Australia (CBA) comes in second, as it trials blockchain technology with its subsidiaries since 2015 and has set up two “Innovation Labs” for Artificial Intelligence (AI) and Machine Learning Systems research, with a third lab planned  in London in 2016. “The internationalization of technological research is a key element of CBA’s strategy into the future”, he concluded.

The study considered that FinTech’s future is heavily dependent on public authorities’ policy: “The future growth of the Australian Fintech sector will depend on how much the government chooses to favor the Big Four banks and keep the financial sector regulated against market volatility.”

Two weeks ago, the Australian Securities & Investments Commission (ASIC) opened the door to a friendlier approach on FinTech startups, aiming to review the Australian Market License (AML) in subjects such as requirements for crowdfunding intermediaries and ease eligibility for Equity Crowdfunding regardless of companies’ assets and turnover. Australia will also ease taxes for venture capital investments in start-up FinTech firms and an end to double taxation of digital currencies. Compliance experts in Australia have shown some skepticism as traditional banking usually gets the upper leg.

KPMG published a report about Australia major banks’ results in 2015, showing higher cash profit after tax, with NAB ranking 1st in growth, AUS$5.8 billion (+15.5%). ANZ profited AUS$7.2 billion (+1.4%), while CBA obtained AUS$9.1 billion (5.3%) and WBC AUS$7.8 billion (+2.5%).

However, the publication said: “Revenue and margin headwinds, rising costs and capital levels, with a deteriorating credit quality outlook all mean the majors will face challenges in reversing declining returns in the years ahead.

Given the rapidly evolving FinTech industry, continued investment in these technologies is critical to combat the emergence of new disruptors to the majors’ traditional market and to protect their customer base”, concluded the report, while predicting more collaboration between the Big Four banks and startups as barriers to entry fall.

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