Like people in most industries, I don’t arrive at work each day readying for an easy time from competitors. After more than 20 years at Westpac, I expect to battle for customers with other banks but also increasingly technology companies and “non-bank” financial services providers.
In fact, I’d argue that barriers to entry may not be as high as some believe, and are actually falling. It’s of course thus not unthinkable that competition could result in the major banks losing market share in the years ahead to tech companies and the 150 local and international financial institutions offering hundreds of products and providers.
That’s by no means a forecast and probably sounds like a strange comment from the chief financial officer of a major bank.
But it’s simply the reality of operating in a highly competitive market, which I firmly believe banking is. That doesn’t mean there aren’t customer “pain points” we can continue to remove and make it easier to deal with a large company, issues at the heart of our Services Revolution strategy. But sifting through the numbers, competition is undeniable: for example, the major banks’ net interest margins have declined over the last 10 years and their cost to income ratios are some of the lowest of any banks in the world after having to become more efficient to compete.
Yes, profits appear large in an absolute sense however we are a very large organisation. Some perspective though, again based on the numbers, is that we have an asset base of roughly $840 billion that in turn delivers a return of less than 1 per cent. From a per share perspective we earnt $2.36 last year. So it’s not surprising research shows that companies in other industries are more profitable than banks, particularly given the higher regulatory and compliance costs on banks since the GFC.
This tightening of regulation on traditional deposit taking banks since the GFC has opened the door to non-banks and “shadow banking” that aren’t without risks to the system given less oversight. More recently, technology companies entered parts of the market, also without having to operate under the same levels of scrutiny and regulation.
There’s Apple Pay, Samsung Pay and Android Pay, although none of these technology companies are regulated as payment providers and often don’t subscribe to voluntary codes of practice. Facebook may also step in with peer-to-peer payments via Messenger after being granted a patent in Australia.
In addition, the government this year unveiled several initiatives to make it easier for smaller lenders to compete, such as relaxing the legislative 15 per cent ownership cap for any one shareholder, allowing more providers to call themselves a “bank” and reviewing prudential licensing arrangements.
All these measures are designed to incentivise more small providers to enter the market and create more competition. Looking at the numbers in recent times, this would appear rational for new operators: smaller (foreign and other domestic) banks have grown profit after tax much faster than the four major banks in recent years.
The RBA’s data shows that since 2012, the big banks’ market shares have declined slightly. Prior to that, the big banks’ post-GFC jump in share of assets from around 72 per cent to 78 per cent of all deposit taking institutions was largely due to two large consolidations in 2008: Westpac’s merger with St George and the Commonwealth Bank’s acquisition of BankWest and St Andrews.
Australia wasn’t alone in witnessing consolidation during the GFC and other similar nations also have banking systems with a handful of large providers, such as Canada and across Scandinavia where return on equity is a similar 14 per cent. Australia’s major banks have experienced falling returns since the GFC due to greater competition and rising capital requirements. Yes, ROE remains above banks in the likes of the UK where the crisis had a larger impact, albeit it’s worth remembering British lenders were generating returns north of 20 per cent prior to the GFC and have since struggled in more difficult economic conditions.
Of course, we at Westpac are investing and innovating, seeking to grow market share and meet changing customer preferences, a goal of most companies. This will only occur if we address pain points for customers – such as comparing products and making it easier to change banks – while developing new products and offerings that customers want.
We support initiatives that encourage new entrants. We also back the new open data regime being developed, believing it will give consumers greater autonomy while allowing financial services providers to offer more targeted and tailored products and services.
But we must get the balance right between competition and financial stability – two goals that at times may create tension – and ensure new entrants meet the same high standards imposed on banks, some of the most tightly regulated companies in the world.
Research has shown that many younger Australians would be inclined to bank with a tech giant depending on the offering. But we are up for the challenge and proud of our history of digital innovation, being a global leader in technology across financial services for many years.
If more competition inspires us to retain that position, that’s a good thing for us and customers.
You can read Westpac’s submission to the Productivity Commission’s review of competition in the financial system here.