Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Pacific rim. I'm Tom mccorvette,
Speaker 1: editor for Bloomberg Intelligence in Hong Kong, and I'm John Lee,
Speaker 1: marketing analysts with Bloomberg Intelligence. Digital payment services are shaking
Speaker 1: up the way we buy and sell, both online and offline.
Speaker 1: Apple and Google pay a leading the charge, but smaller
Speaker 1: upstarts are also pushing hard for a piece of this
Speaker 1: lucrative two trillion dollar market. All are nipping at the
Speaker 1: heels of the big traditional banks which were once the
Speaker 1: undisputed masters of payments. Their credit cards now face unprecedented rivalry,
Speaker 1: their profits are at risk, and Australia has become a
Speaker 1: key battleground. What does this mean for Australia's big banks?
Speaker 1: The trends after the pandemic inveins startling. It's very hard
Speaker 1: now for the banks to reggae in the initiative. Here,
Speaker 1: let's bring in Matt Ingram, senior financial analyst with Bloomberg
Speaker 1: Intelligence in Sydney. Matt welcome, gooday, Tom, gooday, John Great
Speaker 1: to be on board. Matt Digital wallets have been around
Speaker 1: for years. Recently they've gone from being background noise to
Speaker 1: serious contenders for Australian banks. And we had a tipping
Speaker 1: point for digital payments John, it's it's an exciting time
Speaker 1: for payments, Jack Baxter and I and Sydney have done
Speaker 1: a real deep dive and dive on these trends recently.
Speaker 1: And the pandemic was a game changer for payments in Australia,
Speaker 1: particularly for small business You may recall prior to lockdowns,
Speaker 1: many small businesses were cash only. You think your local
Speaker 1: sushi shop, they wouldn't have accepted cards at all. Now
Speaker 1: most do either through a bank provided terminal or something
Speaker 1: like a square terminal. Now, behavior changed substantially across the
Speaker 1: retail space during the pandemic, and I think that trend
Speaker 1: is embedded now many more people are using while it's
Speaker 1: multiple times a day versus perhaps once a day for
Speaker 1: their banks app, and the virtually not visiting the branch
Speaker 1: at all. I think that trend has tipped the balance
Speaker 1: away from banks and I'm not sure how they're going
Speaker 1: to regain the initiatives. So, Matt, can you provide some
Speaker 1: numbers what percentage of total consumer sales are now purchased
Speaker 1: using digital wallets like Apple Paying, Google Pay versus traditional
Speaker 1: credit cards. John the trends after the pandemic events startling
Speaker 1: wallets jumped from about three percent of retail sales and
Speaker 1: eighteen in Australia, and we think that's substantially higher again
Speaker 1: in Obviously it's pretty popular for e commerce transactions. It's
Speaker 1: about of total. But I think the trend that worries
Speaker 1: banks is the jump from two percent of in store
Speaker 1: sales to eleven. Now that's the traditional domain of banks
Speaker 1: and credit card providers like Visa and MasterCard. C BA
Speaker 1: said that about It's wallet payments are made by tapping
Speaker 1: an Apple device, either a watch or a phone. That's
Speaker 1: an amazing competitive advantage for Apple given they had just
Speaker 1: the market share of phones in Australia. Now, this suggests
Speaker 1: to me that there's still significant room for while it
Speaker 1: uptake to continue. Matt was the rise of digital payments
Speaker 1: inevitable given the Martrop technology the evolution of technology. Is
Speaker 1: there anything the banks could have done to prevent themselves
Speaker 1: from becoming so vulnerable? Well, thanks time. Look, it's probably
Speaker 1: unfair to say they are asleep at the wheel, but
Speaker 1: I think they were fighting a fire on multiple fronts.
Speaker 1: They were not only focused with scaling down their branch networks.
Speaker 1: They initially were focused on ramping up a t m s,
Speaker 1: only to ramp down a t m S when they
Speaker 1: realize that ATMs are an expensive way of interacting with
Speaker 1: their customer. They were they were very much focused on
Speaker 1: increasing card transactions instead of cash transactions. The money they
Speaker 1: invested in getting out of branches and and doing some
Speaker 1: kind of transitional step could have been spent on going
Speaker 1: in and being strong and leading digital. Look, that's what
Speaker 1: they could have done. They could have adopted the true
Speaker 1: digital technology, not just sort of transferring money online from
Speaker 1: one account to another, but actually facilitating digital payments like
Speaker 1: we're seeing from Square and other companies like that. So
Speaker 1: I think there's two sort of tail winds that are
Speaker 1: going to continue this trend. The first is that android
Speaker 1: penetration is extremely low, and the second is that Australia,
Speaker 1: which is a fairly tech savvy market, is still lower
Speaker 1: in penetration than the US. So mat was this a
Speaker 1: case of consumers going into shops and rather than taking
Speaker 1: out their credit cards from their wallets, that just tap
Speaker 1: their phones to pay the sort of the pop survey
Speaker 1: that I've done around the office, and certainly my own
Speaker 1: spending habits post pandemic. It's that and some I pay
Speaker 1: for the m R T in Singapore by tapping my phone.
Speaker 1: I buy sushi by tapping my phone, by a case
Speaker 1: of wine by tapping my phone. It's it's everything from
Speaker 1: a one dollar transaction to a five dollar transaction. And
Speaker 1: I think that's fairly typical of your your average smartphone user.
Speaker 1: So can you talk us through the economics if customers
Speaker 1: pay using their digital wallets versus a credit card, a
Speaker 1: physical credit card, how would this impact the revenue for banks?
Speaker 1: There's two sides to that equation, John. We think the
Speaker 1: payments business in its entirety in Australia is about two
Speaker 1: point five billion dollars, or at least the retail point
Speaker 1: of sale payments business is about two point five billion dollars.
Speaker 1: The cost of the tapping is about six million dollars
Speaker 1: a year, So the banks don't want your tapping your phone.
Speaker 1: The real rub, though, is that the banks are losing
Speaker 1: ownership of their customers. Once upon a time, in the
Speaker 1: days of bricks and mortar, the relationship was fortified by
Speaker 1: bricks and mortar branches where you had to go into
Speaker 1: a branch to deposit your money, and the relationship was
Speaker 1: a very solid, very sticky one, and I think inadvertently
Speaker 1: what the banks have done is they've handed over ownership
Speaker 1: of that relationship to Google and Apple, and they've put
Speaker 1: Google and Apple in a position where they can be
Speaker 1: disintermediated because the customer is no longer having a relationship
Speaker 1: with the bank, they're having it with the wallet provider.
Speaker 1: That that gets accentuated if the back end, if the
Speaker 1: pipes of the payment network also move away from traditional
Speaker 1: channels onto some form of blockchain functionality, and there are
Speaker 1: providers that are that are exploring that. Already, two pretty
Speaker 1: key examples I think that are exciting a lot of
Speaker 1: payments practitioners. Shopify has already adopted a lightning functionality. So
Speaker 1: Shopify has got about two million customers globally. There be
Speaker 1: two b Payments can now be done over the blockchain
Speaker 1: virtually instantaneously at virtually no cost. That does give the
Speaker 1: functionality now for Shopify to bypass banks and card companies completely.
Speaker 1: Strike which is another another solution is also offering again
Speaker 1: payment channels that bypass bank networks completely. They're offering FEX products,
Speaker 1: and efex is a hugely lucrative, very transparent business. And
Speaker 1: so those are two examples of where the banks have
Speaker 1: already lost the initiative and where this sort of reintermediation
Speaker 1: to become disintermediation of the banks could could eventually happen.
Speaker 1: Does it surprise you how quickly these new payment trends
Speaker 1: took off and how quickly they were accepted. I think, Look,
Speaker 1: I wouldn't call myself a visionary Tom, and so I
Speaker 1: think the wallet makes sense. It's extremely convenient, buy now,
Speaker 1: pay later. I think it's extraordinary. It's it's created a
Speaker 1: seemingly a new market out of thin air younger borrowers.
Speaker 1: I think quite cynical of the big banks after the
Speaker 1: global financial crisis. I think they're very scared of credit cards. Matt,
Speaker 1: let's talk about b n P L or buy Now,
Speaker 1: Pay Later. Give us an idea as to how this
Speaker 1: fits into the broader matrix, and how these providers manage
Speaker 1: credit risk with regard to the consumer and the merchant,
Speaker 1: and how big a threat does buying LP leader posed
Speaker 1: to banks. So just quickly to explain how it works,
Speaker 1: it's it's a service provided by the likes of of
Speaker 1: Cliner or or after Pay or ZIP, and it's actually
Speaker 1: a service provider to the retailer. So the payment occurs
Speaker 1: between the retailer and that provider. It's sort of something
Speaker 1: like four to six of the transaction value. That's versus
Speaker 1: about two percent for a credit card transaction. So the
Speaker 1: relationship there is between between the buying our pay later
Speaker 1: company and the merchant, and then the customer at the
Speaker 1: other end pays the ticket price. It could be that
Speaker 1: it could be the markdown boxing Dale sale price. They
Speaker 1: don't wear any costs at all from the transaction. A
Speaker 1: key part of that buying our Pay later relationship is
Speaker 1: that they stipulate to the merchant that there's no pass
Speaker 1: on of the fee. That creates a sort of an arbitrage.
Speaker 1: They can charge what they want. They're not competing with
Speaker 1: the two percent fee the credit card company's charge. Look,
Speaker 1: we did see a massive massive uptick in incredit issues
Speaker 1: across the sector last year from extre emily low levels,
Speaker 1: and certainly the credit quality is worse than your traditional
Speaker 1: sort of consumer finance providers, but they're still tweaking going
Speaker 1: on the risk models. ZIP did a major overhaul of
Speaker 1: its its credit models last year, which did impact its
Speaker 1: growth in the second half of two but their their
Speaker 1: credits trending back towards about two percent of transaction volumes,
Speaker 1: and given the significant margins they're making their market making
Speaker 1: a six percent gross margin on that transaction, and the
Speaker 1: operating costs are extremely low so that they can afford
Speaker 1: to take that two percent credit haircut. So the trillion
Speaker 1: dollar question, tom, is what happens when interest rates really bite.
Speaker 1: In terms of the product, it's it's a fairly different
Speaker 1: demographic as well. It's tends to be a younger demographic.
Speaker 1: They're using it as a savings plan. I can't buy
Speaker 1: my my new dress or my skateboard or my bicycle today,
Speaker 1: I don't have the cash. So I'm going to spread
Speaker 1: that over three pay cycles of three fortnits and so
Speaker 1: it's I think seen as the savings planned by a
Speaker 1: lot of the users, and the company has said there
Speaker 1: has been no change to that trend. So look, I
Speaker 1: think it's naive to think that this industry will be
Speaker 1: immune from credit pressures as interest rates really start biting.
Speaker 1: But the business model, I think is resilient. I think
Speaker 1: the business model is getting a harder wrap than is
Speaker 1: due based on your logic. Both buying our pay leader
Speaker 1: or be in p L, as well as the digital
Speaker 1: wallets really thrived during the pandemic. Now we're coming out
Speaker 1: of the pandemic. Do you think these trends will reverse.
Speaker 1: It's a huge question, John, not just for buying Our
Speaker 1: pay Later, but for wallets and e commerce generally. It's
Speaker 1: one thing when somebody's sitting at home eighteen hours a day, work, play,
Speaker 1: recreation in front of their computer in their living room.
Speaker 1: I think something that gives a bit of comfort to
Speaker 1: buying our pay Later volumes is that they did stay
Speaker 1: very healthy in people went back to work last year
Speaker 1: and certainly the last six months I think would have
Speaker 1: given the providers some hope that the business is sustainable
Speaker 1: in environment where people aren't parked at their desks at
Speaker 1: home most of the time. The wallet trend off as convenience.
Speaker 1: It puts all your cards in one place and and amazingly,
Speaker 1: I think the trend that happened over the pandemic as
Speaker 1: many retailers now only accept credit cards, where four years
Speaker 1: ago cash was preferred. So if you're in the habit
Speaker 1: of tapping your phone. Every retailer you walk in now
Speaker 1: is going to accept it. I think the only way
Speaker 1: banks arrest this trend is, as I said before, I
Speaker 1: think they need to embed some kind of NFC or
Speaker 1: tapped to pay technology within their own ecosystem. When I
Speaker 1: look at where the banks have gone with this, all
Speaker 1: of the Australian banks have spent a good chunk of
Speaker 1: the last four years fighting with Apple and working away
Speaker 1: that they can actually be present on the Apple platform,
Speaker 1: and perhaps in hindsight, that energy would have been better
Speaker 1: spent having their own tap to pay per actionality in
Speaker 1: their own ecosystem. Matt, you're painting a picture of a
Speaker 1: brave new world in digital commerce and digital finance. Where
Speaker 1: does cash stand in this scenario? Or you're describing Yeah, Tom,
Speaker 1: it's interesting. Um, I think most people are frustrated with cash.
Speaker 1: To be honest, If you if you're asked by your
Speaker 1: children to bring a gold coin donation for our for
Speaker 1: the Easter hat parade or or some kind of touch
Speaker 1: shop at lunchtime, it normally necessitates a race out to
Speaker 1: an a t M and then a trip to the
Speaker 1: coffee shop to get some change. I think most people
Speaker 1: now are actually very short on cash, and I think
Speaker 1: that's here to stay. Matt, give us a glimpse into
Speaker 1: your crystal ball. What do you see five to ten
Speaker 1: years down the road the dynamic between the banks the
Speaker 1: digital payment systems. How does the interplay between them unfold? Yeah, thanks, Tom,
Speaker 1: look at it. It's it's a good segue into something
Speaker 1: we haven't spent as much time talking about as we
Speaker 1: could have maybe, and that's that's the impact of the
Speaker 1: crypto on this on this theme, So where do I
Speaker 1: see things in five to ten years. I think Visa
Speaker 1: and master cards strangle hold on payment networks will be
Speaker 1: at least weakened. I think there's a there's a variety
Speaker 1: of different settlement methods available over the crypto block chains,
Speaker 1: and I think those might eventually become the default. Our
Speaker 1: crypto analyst here in Sydney, Jamie Douglas Coots, certainly thinks
Speaker 1: that in the longer term, those those settlements over the
Speaker 1: blockchain networks are going to become fairly commonplace, and so
Speaker 1: that gives the opportunity for businesses for consumers to transact
Speaker 1: instantaneously at much lower cost. So that's number one. I
Speaker 1: think the pipes at the back of payments become far cheaper,
Speaker 1: far quicker, and operated outside the oligopoly of Visa and
Speaker 1: master Card. The second thing I think is the horses
Speaker 1: bolted now and wallets are established. And I think wallets
Speaker 1: will continue to be the predominant way that people will
Speaker 1: pay for things, whether that's via your phone or your
Speaker 1: watch or whatever. But I think that the trend of
Speaker 1: people tapping plastic plastic cards is one that's going to
Speaker 1: going to decline further. I think deposit balances for banks,
Speaker 1: particularly the cheap transaction deposits, are under threat globally. I
Speaker 1: think customers are becoming far more savvy, and they've got
Speaker 1: access to far more information than they would have had
Speaker 1: in our parents generation, and so customers know that they're
Speaker 1: getting a raw deal parking their deposit in a bank
Speaker 1: for no interest. They don't want to park all that
Speaker 1: cash there, and neither does a small business. A small business,
Speaker 1: I think, is also probably more savvy in that respect,
Speaker 1: and so I think the deposit franchises the banks get eroded.
Speaker 1: What does that mean for the sector? Look, I think
Speaker 1: it means high funding costs on average. I think this
Speaker 1: access to extremely cheap funding, certainly for banks in developed
Speaker 1: markets is going to be something that's challenged, and so
Speaker 1: through the cycle, I think the only thing that happens
Speaker 1: there is that banks margins get constrained. I think a
Speaker 1: bank business model is still something that's extremely sustainable. But
Speaker 1: but the wash up of that is that banks payments
Speaker 1: revenues get eaten. I think banks deposit franchises get cannibalized
Speaker 1: a little bit, and I think their their earnings that
Speaker 1: they can make on those deposit franchises get constrained, and overall,
Speaker 1: I think the profitability of the industry, the banking industry
Speaker 1: certainly may be pressured. Man A lot of names stand
Speaker 1: to profit from digital payments, Apple, Google, Squares, Zip, Sharpify.
Speaker 1: Is there an easy way for investors to get exposure
Speaker 1: to the space? Look, digital payments is going through exciting
Speaker 1: times and we're quite excited with the with the positioning
Speaker 1: of that within Bloomberg Intelligence. We've created a digital payments
Speaker 1: basket over the last couple of years. That's a method
Speaker 1: for investors to get exposure to the largest and most
Speaker 1: sensitive companies to digital payments globally. We offer a variety
Speaker 1: of solutions via our via our partners to invest in
Speaker 1: that theme. And it's something we're extremely excited about. Matt.
Speaker 1: Final question, The Aussie stock market is dominated by banks.
Speaker 1: If you look at the market cap, I think four
Speaker 1: of the biggest six belonging to the Big four Australian banks.
Speaker 1: Given all these challenges, do you think this will still
Speaker 1: be the case in five years from now? Yeah, Jee,
Speaker 1: it's a good question, John. I think again, if I
Speaker 1: had a dollar for everyone, every time someone had called
Speaker 1: the end of the the oligopoly of the big four
Speaker 1: Australian banks and their dominance of the Australian stock market, again,
Speaker 1: I think I'd be I'd be retired on the beach.
Speaker 1: But look, I think they've still got a substantial economic mode.
Speaker 1: This sounds like I'm having a bet each way. I've
Speaker 1: spent the last twenty minutes talking about the threats to them,
Speaker 1: but their economic mode is still huge. Their deposit franchises
Speaker 1: are significant. They may shrink, but they're clearly not going
Speaker 1: to go to zero. They've got a significant funding advantage
Speaker 1: on the back of the Australian government's very strong credit rating.
Speaker 1: Customers are fairly mature in the relationships that they have
Speaker 1: with them, and they're very sticky and at least for
Speaker 1: the next two to three years. Higher interest rates give
Speaker 1: them a massive lift in profitability and in profit so look,
Speaker 1: their valuations held up well last year. They they outperformed
Speaker 1: a fairly week Australian market despite the market volatility, despite
Speaker 1: potential threats from our from appending recession as interest rates
Speaker 1: really buy it. And look, I think in the absence John,
Speaker 1: of a massive credit crunch that might be on the
Speaker 1: back of the rate hikes, and that's not our base case.
Speaker 1: That's very unlikely in our opinion. In the absence of
Speaker 1: a massive credit crunch, I think the outlook for Australian
Speaker 1: banks remains very healthy. Mad and Grom Senior analyst with
Speaker 1: Bloomberg Intelligence. Matt some fascinating material and a compelling glimpse
Speaker 1: at the way technology is changing, how the way we
Speaker 1: buy sell and sharp. Thanks Tom's thanks John at certainly
Speaker 1: exciting times and I guess watch this space. I'm Tom Corbett,
Speaker 1: editor with Bloomberg Intelligence in Hong Kong, and I'm John Lee,
Speaker 1: and you've been listening to the Asia Centric podcast