WEBVTT - Consumers Are Turning Away From Traditional Banks: Asia Centric

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<v Speaker 1>You're listening to Asia Centric from Bloomberg Intelligence, the podcast

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<v Speaker 1>that pulls back the curtain on global business so you

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<v Speaker 1>can invest better across the Pacific rim. I'm Tom mccorvette,

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<v Speaker 1>editor for Bloomberg Intelligence in Hong Kong, and I'm John Lee,

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<v Speaker 1>marketing analysts with Bloomberg Intelligence. Digital payment services are shaking

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<v Speaker 1>up the way we buy and sell, both online and offline.

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<v Speaker 1>Apple and Google pay a leading the charge, but smaller

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<v Speaker 1>upstarts are also pushing hard for a piece of this

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<v Speaker 1>lucrative two trillion dollar market. All are nipping at the

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<v Speaker 1>heels of the big traditional banks which were once the

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<v Speaker 1>undisputed masters of payments. Their credit cards now face unprecedented rivalry,

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<v Speaker 1>their profits are at risk, and Australia has become a

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<v Speaker 1>key battleground. What does this mean for Australia's big banks?

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<v Speaker 1>The trends after the pandemic inveins startling. It's very hard

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<v Speaker 1>now for the banks to reggae in the initiative. Here,

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<v Speaker 1>let's bring in Matt Ingram, senior financial analyst with Bloomberg

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<v Speaker 1>Intelligence in Sydney. Matt welcome, gooday, Tom, gooday, John Great

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<v Speaker 1>to be on board. Matt Digital wallets have been around

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<v Speaker 1>for years. Recently they've gone from being background noise to

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<v Speaker 1>serious contenders for Australian banks. And we had a tipping

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<v Speaker 1>point for digital payments John, it's it's an exciting time

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<v Speaker 1>for payments, Jack Baxter and I and Sydney have done

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<v Speaker 1>a real deep dive and dive on these trends recently.

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<v Speaker 1>And the pandemic was a game changer for payments in Australia,

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<v Speaker 1>particularly for small business You may recall prior to lockdowns,

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<v Speaker 1>many small businesses were cash only. You think your local

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<v Speaker 1>sushi shop, they wouldn't have accepted cards at all. Now

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<v Speaker 1>most do either through a bank provided terminal or something

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<v Speaker 1>like a square terminal. Now, behavior changed substantially across the

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<v Speaker 1>retail space during the pandemic, and I think that trend

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<v Speaker 1>is embedded now many more people are using while it's

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<v Speaker 1>multiple times a day versus perhaps once a day for

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<v Speaker 1>their banks app, and the virtually not visiting the branch

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<v Speaker 1>at all. I think that trend has tipped the balance

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<v Speaker 1>away from banks and I'm not sure how they're going

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<v Speaker 1>to regain the initiatives. So, Matt, can you provide some

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<v Speaker 1>numbers what percentage of total consumer sales are now purchased

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<v Speaker 1>using digital wallets like Apple Paying, Google Pay versus traditional

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<v Speaker 1>credit cards. John the trends after the pandemic events startling

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<v Speaker 1>wallets jumped from about three percent of retail sales and

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<v Speaker 1>eighteen in Australia, and we think that's substantially higher again

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<v Speaker 1>in Obviously it's pretty popular for e commerce transactions. It's

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<v Speaker 1>about of total. But I think the trend that worries

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<v Speaker 1>banks is the jump from two percent of in store

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<v Speaker 1>sales to eleven. Now that's the traditional domain of banks

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<v Speaker 1>and credit card providers like Visa and MasterCard. C BA

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<v Speaker 1>said that about It's wallet payments are made by tapping

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<v Speaker 1>an Apple device, either a watch or a phone. That's

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<v Speaker 1>an amazing competitive advantage for Apple given they had just

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<v Speaker 1>the market share of phones in Australia. Now, this suggests

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<v Speaker 1>to me that there's still significant room for while it

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<v Speaker 1>uptake to continue. Matt was the rise of digital payments

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<v Speaker 1>inevitable given the Martrop technology the evolution of technology. Is

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<v Speaker 1>there anything the banks could have done to prevent themselves

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<v Speaker 1>from becoming so vulnerable? Well, thanks time. Look, it's probably

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<v Speaker 1>unfair to say they are asleep at the wheel, but

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<v Speaker 1>I think they were fighting a fire on multiple fronts.

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<v Speaker 1>They were not only focused with scaling down their branch networks.

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<v Speaker 1>They initially were focused on ramping up a t m s,

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<v Speaker 1>only to ramp down a t m S when they

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<v Speaker 1>realize that ATMs are an expensive way of interacting with

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<v Speaker 1>their customer. They were they were very much focused on

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<v Speaker 1>increasing card transactions instead of cash transactions. The money they

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<v Speaker 1>invested in getting out of branches and and doing some

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<v Speaker 1>kind of transitional step could have been spent on going

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<v Speaker 1>in and being strong and leading digital. Look, that's what

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<v Speaker 1>they could have done. They could have adopted the true

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<v Speaker 1>digital technology, not just sort of transferring money online from

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<v Speaker 1>one account to another, but actually facilitating digital payments like

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<v Speaker 1>we're seeing from Square and other companies like that. So

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<v Speaker 1>I think there's two sort of tail winds that are

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<v Speaker 1>going to continue this trend. The first is that android

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<v Speaker 1>penetration is extremely low, and the second is that Australia,

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<v Speaker 1>which is a fairly tech savvy market, is still lower

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<v Speaker 1>in penetration than the US. So mat was this a

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<v Speaker 1>case of consumers going into shops and rather than taking

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<v Speaker 1>out their credit cards from their wallets, that just tap

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<v Speaker 1>their phones to pay the sort of the pop survey

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<v Speaker 1>that I've done around the office, and certainly my own

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<v Speaker 1>spending habits post pandemic. It's that and some I pay

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<v Speaker 1>for the m R T in Singapore by tapping my phone.

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<v Speaker 1>I buy sushi by tapping my phone, by a case

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<v Speaker 1>of wine by tapping my phone. It's it's everything from

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<v Speaker 1>a one dollar transaction to a five dollar transaction. And

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<v Speaker 1>I think that's fairly typical of your your average smartphone user.

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<v Speaker 1>So can you talk us through the economics if customers

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<v Speaker 1>pay using their digital wallets versus a credit card, a

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<v Speaker 1>physical credit card, how would this impact the revenue for banks?

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<v Speaker 1>There's two sides to that equation, John. We think the

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<v Speaker 1>payments business in its entirety in Australia is about two

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<v Speaker 1>point five billion dollars, or at least the retail point

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<v Speaker 1>of sale payments business is about two point five billion dollars.

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<v Speaker 1>The cost of the tapping is about six million dollars

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<v Speaker 1>a year, So the banks don't want your tapping your phone.

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<v Speaker 1>The real rub, though, is that the banks are losing

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<v Speaker 1>ownership of their customers. Once upon a time, in the

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<v Speaker 1>days of bricks and mortar, the relationship was fortified by

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<v Speaker 1>bricks and mortar branches where you had to go into

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<v Speaker 1>a branch to deposit your money, and the relationship was

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<v Speaker 1>a very solid, very sticky one, and I think inadvertently

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<v Speaker 1>what the banks have done is they've handed over ownership

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<v Speaker 1>of that relationship to Google and Apple, and they've put

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<v Speaker 1>Google and Apple in a position where they can be

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<v Speaker 1>disintermediated because the customer is no longer having a relationship

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<v Speaker 1>with the bank, they're having it with the wallet provider.

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<v Speaker 1>That that gets accentuated if the back end, if the

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<v Speaker 1>pipes of the payment network also move away from traditional

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<v Speaker 1>channels onto some form of blockchain functionality, and there are

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<v Speaker 1>providers that are that are exploring that. Already, two pretty

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<v Speaker 1>key examples I think that are exciting a lot of

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<v Speaker 1>payments practitioners. Shopify has already adopted a lightning functionality. So

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<v Speaker 1>Shopify has got about two million customers globally. There be

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<v Speaker 1>two b Payments can now be done over the blockchain

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<v Speaker 1>virtually instantaneously at virtually no cost. That does give the

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<v Speaker 1>functionality now for Shopify to bypass banks and card companies completely.

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<v Speaker 1>Strike which is another another solution is also offering again

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<v Speaker 1>payment channels that bypass bank networks completely. They're offering FEX products,

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<v Speaker 1>and efex is a hugely lucrative, very transparent business. And

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<v Speaker 1>so those are two examples of where the banks have

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<v Speaker 1>already lost the initiative and where this sort of reintermediation

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<v Speaker 1>to become disintermediation of the banks could could eventually happen.

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<v Speaker 1>Does it surprise you how quickly these new payment trends

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<v Speaker 1>took off and how quickly they were accepted. I think, Look,

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<v Speaker 1>I wouldn't call myself a visionary Tom, and so I

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<v Speaker 1>think the wallet makes sense. It's extremely convenient, buy now,

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<v Speaker 1>pay later. I think it's extraordinary. It's it's created a

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<v Speaker 1>seemingly a new market out of thin air younger borrowers.

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<v Speaker 1>I think quite cynical of the big banks after the

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<v Speaker 1>global financial crisis. I think they're very scared of credit cards. Matt,

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<v Speaker 1>let's talk about b n P L or buy Now,

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<v Speaker 1>Pay Later. Give us an idea as to how this

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<v Speaker 1>fits into the broader matrix, and how these providers manage

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<v Speaker 1>credit risk with regard to the consumer and the merchant,

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<v Speaker 1>and how big a threat does buying LP leader posed

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<v Speaker 1>to banks. So just quickly to explain how it works,

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<v Speaker 1>it's it's a service provided by the likes of of

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<v Speaker 1>Cliner or or after Pay or ZIP, and it's actually

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<v Speaker 1>a service provider to the retailer. So the payment occurs

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<v Speaker 1>between the retailer and that provider. It's sort of something

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<v Speaker 1>like four to six of the transaction value. That's versus

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<v Speaker 1>about two percent for a credit card transaction. So the

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<v Speaker 1>relationship there is between between the buying our pay later

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<v Speaker 1>company and the merchant, and then the customer at the

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<v Speaker 1>other end pays the ticket price. It could be that

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<v Speaker 1>it could be the markdown boxing Dale sale price. They

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<v Speaker 1>don't wear any costs at all from the transaction. A

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<v Speaker 1>key part of that buying our Pay later relationship is

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<v Speaker 1>that they stipulate to the merchant that there's no pass

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<v Speaker 1>on of the fee. That creates a sort of an arbitrage.

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<v Speaker 1>They can charge what they want. They're not competing with

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<v Speaker 1>the two percent fee the credit card company's charge. Look,

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<v Speaker 1>we did see a massive massive uptick in incredit issues

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<v Speaker 1>across the sector last year from extre emily low levels,

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<v Speaker 1>and certainly the credit quality is worse than your traditional

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<v Speaker 1>sort of consumer finance providers, but they're still tweaking going

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<v Speaker 1>on the risk models. ZIP did a major overhaul of

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<v Speaker 1>its its credit models last year, which did impact its

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<v Speaker 1>growth in the second half of two but their their

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<v Speaker 1>credits trending back towards about two percent of transaction volumes,

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<v Speaker 1>and given the significant margins they're making their market making

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<v Speaker 1>a six percent gross margin on that transaction, and the

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<v Speaker 1>operating costs are extremely low so that they can afford

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<v Speaker 1>to take that two percent credit haircut. So the trillion

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<v Speaker 1>dollar question, tom, is what happens when interest rates really bite.

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<v Speaker 1>In terms of the product, it's it's a fairly different

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<v Speaker 1>demographic as well. It's tends to be a younger demographic.

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<v Speaker 1>They're using it as a savings plan. I can't buy

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<v Speaker 1>my my new dress or my skateboard or my bicycle today,

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<v Speaker 1>I don't have the cash. So I'm going to spread

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<v Speaker 1>that over three pay cycles of three fortnits and so

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<v Speaker 1>it's I think seen as the savings planned by a

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<v Speaker 1>lot of the users, and the company has said there

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<v Speaker 1>has been no change to that trend. So look, I

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<v Speaker 1>think it's naive to think that this industry will be

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<v Speaker 1>immune from credit pressures as interest rates really start biting.

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<v Speaker 1>But the business model, I think is resilient. I think

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<v Speaker 1>the business model is getting a harder wrap than is

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<v Speaker 1>due based on your logic. Both buying our pay leader

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<v Speaker 1>or be in p L, as well as the digital

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<v Speaker 1>wallets really thrived during the pandemic. Now we're coming out

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<v Speaker 1>of the pandemic. Do you think these trends will reverse.

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<v Speaker 1>It's a huge question, John, not just for buying Our

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<v Speaker 1>pay Later, but for wallets and e commerce generally. It's

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<v Speaker 1>one thing when somebody's sitting at home eighteen hours a day, work, play,

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<v Speaker 1>recreation in front of their computer in their living room.

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<v Speaker 1>I think something that gives a bit of comfort to

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<v Speaker 1>buying our pay Later volumes is that they did stay

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<v Speaker 1>very healthy in people went back to work last year

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<v Speaker 1>and certainly the last six months I think would have

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<v Speaker 1>given the providers some hope that the business is sustainable

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<v Speaker 1>in environment where people aren't parked at their desks at

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<v Speaker 1>home most of the time. The wallet trend off as convenience.

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<v Speaker 1>It puts all your cards in one place and and amazingly,

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<v Speaker 1>I think the trend that happened over the pandemic as

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<v Speaker 1>many retailers now only accept credit cards, where four years

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<v Speaker 1>ago cash was preferred. So if you're in the habit

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<v Speaker 1>of tapping your phone. Every retailer you walk in now

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<v Speaker 1>is going to accept it. I think the only way

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<v Speaker 1>banks arrest this trend is, as I said before, I

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<v Speaker 1>think they need to embed some kind of NFC or

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<v Speaker 1>tapped to pay technology within their own ecosystem. When I

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<v Speaker 1>look at where the banks have gone with this, all

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<v Speaker 1>of the Australian banks have spent a good chunk of

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<v Speaker 1>the last four years fighting with Apple and working away

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<v Speaker 1>that they can actually be present on the Apple platform,

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<v Speaker 1>and perhaps in hindsight, that energy would have been better

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<v Speaker 1>spent having their own tap to pay per actionality in

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<v Speaker 1>their own ecosystem. Matt, you're painting a picture of a

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<v Speaker 1>brave new world in digital commerce and digital finance. Where

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<v Speaker 1>does cash stand in this scenario? Or you're describing Yeah, Tom,

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<v Speaker 1>it's interesting. Um, I think most people are frustrated with cash.

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<v Speaker 1>To be honest, If you if you're asked by your

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<v Speaker 1>children to bring a gold coin donation for our for

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<v Speaker 1>the Easter hat parade or or some kind of touch

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<v Speaker 1>shop at lunchtime, it normally necessitates a race out to

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<v Speaker 1>an a t M and then a trip to the

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<v Speaker 1>coffee shop to get some change. I think most people

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<v Speaker 1>now are actually very short on cash, and I think

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<v Speaker 1>that's here to stay. Matt, give us a glimpse into

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<v Speaker 1>your crystal ball. What do you see five to ten

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<v Speaker 1>years down the road the dynamic between the banks the

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<v Speaker 1>digital payment systems. How does the interplay between them unfold? Yeah, thanks, Tom,

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<v Speaker 1>look at it. It's it's a good segue into something

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<v Speaker 1>we haven't spent as much time talking about as we

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<v Speaker 1>could have maybe, and that's that's the impact of the

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<v Speaker 1>crypto on this on this theme, So where do I

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<v Speaker 1>see things in five to ten years. I think Visa

0:13:08.920 --> 0:13:12.360
<v Speaker 1>and master cards strangle hold on payment networks will be

0:13:12.400 --> 0:13:16.160
<v Speaker 1>at least weakened. I think there's a there's a variety

0:13:16.240 --> 0:13:19.640
<v Speaker 1>of different settlement methods available over the crypto block chains,

0:13:19.640 --> 0:13:22.880
<v Speaker 1>and I think those might eventually become the default. Our

0:13:22.920 --> 0:13:27.080
<v Speaker 1>crypto analyst here in Sydney, Jamie Douglas Coots, certainly thinks

0:13:27.520 --> 0:13:30.199
<v Speaker 1>that in the longer term, those those settlements over the

0:13:30.240 --> 0:13:34.559
<v Speaker 1>blockchain networks are going to become fairly commonplace, and so

0:13:35.440 --> 0:13:39.720
<v Speaker 1>that gives the opportunity for businesses for consumers to transact

0:13:39.960 --> 0:13:44.000
<v Speaker 1>instantaneously at much lower cost. So that's number one. I

0:13:44.000 --> 0:13:48.200
<v Speaker 1>think the pipes at the back of payments become far cheaper,

0:13:48.559 --> 0:13:52.319
<v Speaker 1>far quicker, and operated outside the oligopoly of Visa and

0:13:52.400 --> 0:13:56.680
<v Speaker 1>master Card. The second thing I think is the horses

0:13:56.720 --> 0:13:59.280
<v Speaker 1>bolted now and wallets are established. And I think wallets

0:13:59.280 --> 0:14:03.439
<v Speaker 1>will continue to be the predominant way that people will

0:14:03.480 --> 0:14:06.679
<v Speaker 1>pay for things, whether that's via your phone or your

0:14:06.679 --> 0:14:09.360
<v Speaker 1>watch or whatever. But I think that the trend of

0:14:09.400 --> 0:14:13.280
<v Speaker 1>people tapping plastic plastic cards is one that's going to

0:14:13.840 --> 0:14:17.559
<v Speaker 1>going to decline further. I think deposit balances for banks,

0:14:17.600 --> 0:14:22.480
<v Speaker 1>particularly the cheap transaction deposits, are under threat globally. I

0:14:22.480 --> 0:14:24.920
<v Speaker 1>think customers are becoming far more savvy, and they've got

0:14:25.200 --> 0:14:28.320
<v Speaker 1>access to far more information than they would have had

0:14:28.880 --> 0:14:32.480
<v Speaker 1>in our parents generation, and so customers know that they're

0:14:32.520 --> 0:14:34.960
<v Speaker 1>getting a raw deal parking their deposit in a bank

0:14:35.280 --> 0:14:37.920
<v Speaker 1>for no interest. They don't want to park all that

0:14:38.000 --> 0:14:40.520
<v Speaker 1>cash there, and neither does a small business. A small business,

0:14:40.920 --> 0:14:43.480
<v Speaker 1>I think, is also probably more savvy in that respect,

0:14:43.840 --> 0:14:46.680
<v Speaker 1>and so I think the deposit franchises the banks get eroded.

0:14:47.240 --> 0:14:49.320
<v Speaker 1>What does that mean for the sector? Look, I think

0:14:49.360 --> 0:14:51.920
<v Speaker 1>it means high funding costs on average. I think this

0:14:52.040 --> 0:14:55.760
<v Speaker 1>access to extremely cheap funding, certainly for banks in developed

0:14:55.760 --> 0:14:58.480
<v Speaker 1>markets is going to be something that's challenged, and so

0:14:59.200 --> 0:15:01.400
<v Speaker 1>through the cycle, I think the only thing that happens

0:15:01.440 --> 0:15:04.120
<v Speaker 1>there is that banks margins get constrained. I think a

0:15:04.160 --> 0:15:08.600
<v Speaker 1>bank business model is still something that's extremely sustainable. But

0:15:08.600 --> 0:15:11.200
<v Speaker 1>but the wash up of that is that banks payments

0:15:11.200 --> 0:15:16.040
<v Speaker 1>revenues get eaten. I think banks deposit franchises get cannibalized

0:15:16.040 --> 0:15:18.120
<v Speaker 1>a little bit, and I think their their earnings that

0:15:18.160 --> 0:15:22.360
<v Speaker 1>they can make on those deposit franchises get constrained, and overall,

0:15:22.360 --> 0:15:24.920
<v Speaker 1>I think the profitability of the industry, the banking industry

0:15:24.960 --> 0:15:28.600
<v Speaker 1>certainly may be pressured. Man A lot of names stand

0:15:28.600 --> 0:15:33.560
<v Speaker 1>to profit from digital payments, Apple, Google, Squares, Zip, Sharpify.

0:15:33.760 --> 0:15:36.480
<v Speaker 1>Is there an easy way for investors to get exposure

0:15:36.520 --> 0:15:41.440
<v Speaker 1>to the space? Look, digital payments is going through exciting

0:15:41.480 --> 0:15:44.120
<v Speaker 1>times and we're quite excited with the with the positioning

0:15:44.160 --> 0:15:48.000
<v Speaker 1>of that within Bloomberg Intelligence. We've created a digital payments

0:15:48.040 --> 0:15:51.240
<v Speaker 1>basket over the last couple of years. That's a method

0:15:51.280 --> 0:15:54.400
<v Speaker 1>for investors to get exposure to the largest and most

0:15:54.440 --> 0:15:58.720
<v Speaker 1>sensitive companies to digital payments globally. We offer a variety

0:15:58.720 --> 0:16:01.720
<v Speaker 1>of solutions via our via our partners to invest in

0:16:01.760 --> 0:16:05.360
<v Speaker 1>that theme. And it's something we're extremely excited about. Matt.

0:16:05.480 --> 0:16:09.320
<v Speaker 1>Final question, The Aussie stock market is dominated by banks.

0:16:09.560 --> 0:16:11.320
<v Speaker 1>If you look at the market cap, I think four

0:16:11.360 --> 0:16:15.000
<v Speaker 1>of the biggest six belonging to the Big four Australian banks.

0:16:15.760 --> 0:16:18.040
<v Speaker 1>Given all these challenges, do you think this will still

0:16:18.040 --> 0:16:20.640
<v Speaker 1>be the case in five years from now? Yeah, Jee,

0:16:20.680 --> 0:16:23.920
<v Speaker 1>it's a good question, John. I think again, if I

0:16:23.920 --> 0:16:26.200
<v Speaker 1>had a dollar for everyone, every time someone had called

0:16:26.200 --> 0:16:29.280
<v Speaker 1>the end of the the oligopoly of the big four

0:16:29.320 --> 0:16:32.360
<v Speaker 1>Australian banks and their dominance of the Australian stock market, again,

0:16:32.440 --> 0:16:34.440
<v Speaker 1>I think I'd be I'd be retired on the beach.

0:16:34.600 --> 0:16:38.520
<v Speaker 1>But look, I think they've still got a substantial economic mode.

0:16:38.640 --> 0:16:40.600
<v Speaker 1>This sounds like I'm having a bet each way. I've

0:16:40.640 --> 0:16:43.720
<v Speaker 1>spent the last twenty minutes talking about the threats to them,

0:16:43.760 --> 0:16:47.520
<v Speaker 1>but their economic mode is still huge. Their deposit franchises

0:16:47.560 --> 0:16:50.960
<v Speaker 1>are significant. They may shrink, but they're clearly not going

0:16:51.000 --> 0:16:55.239
<v Speaker 1>to go to zero. They've got a significant funding advantage

0:16:55.560 --> 0:16:58.400
<v Speaker 1>on the back of the Australian government's very strong credit rating.

0:16:59.280 --> 0:17:02.920
<v Speaker 1>Customers are fairly mature in the relationships that they have

0:17:03.000 --> 0:17:05.600
<v Speaker 1>with them, and they're very sticky and at least for

0:17:05.640 --> 0:17:08.480
<v Speaker 1>the next two to three years. Higher interest rates give

0:17:08.560 --> 0:17:12.720
<v Speaker 1>them a massive lift in profitability and in profit so look,

0:17:12.840 --> 0:17:16.159
<v Speaker 1>their valuations held up well last year. They they outperformed

0:17:16.160 --> 0:17:21.040
<v Speaker 1>a fairly week Australian market despite the market volatility, despite

0:17:21.359 --> 0:17:24.840
<v Speaker 1>potential threats from our from appending recession as interest rates

0:17:24.840 --> 0:17:28.200
<v Speaker 1>really buy it. And look, I think in the absence John,

0:17:28.359 --> 0:17:30.720
<v Speaker 1>of a massive credit crunch that might be on the

0:17:30.760 --> 0:17:32.800
<v Speaker 1>back of the rate hikes, and that's not our base case.

0:17:32.840 --> 0:17:35.600
<v Speaker 1>That's very unlikely in our opinion. In the absence of

0:17:35.600 --> 0:17:38.000
<v Speaker 1>a massive credit crunch, I think the outlook for Australian

0:17:38.040 --> 0:17:41.840
<v Speaker 1>banks remains very healthy. Mad and Grom Senior analyst with

0:17:41.880 --> 0:17:46.280
<v Speaker 1>Bloomberg Intelligence. Matt some fascinating material and a compelling glimpse

0:17:46.280 --> 0:17:48.960
<v Speaker 1>at the way technology is changing, how the way we

0:17:49.320 --> 0:17:52.440
<v Speaker 1>buy sell and sharp. Thanks Tom's thanks John at certainly

0:17:52.480 --> 0:17:56.200
<v Speaker 1>exciting times and I guess watch this space. I'm Tom Corbett,

0:17:56.359 --> 0:17:59.919
<v Speaker 1>editor with Bloomberg Intelligence in Hong Kong, and I'm John Lee,

0:18:00.040 --> 0:18:02.480
<v Speaker 1>and you've been listening to the Asia Centric podcast