By Paurush Singh

November’s hike brought the Reserve Bank’s cash rate to 2.85 per cent, up from 0.1 per cent at the start of the year. And with inflation forecast to hit 8 per cent by Christmas, it is likely the RBA is not finished yet.

This has big impacts on the banking sector, most notably on mortgages, business banking and retail deposits. But it also creates an impetus for them to progress their strategic agendas.

From our close involvement in financial services, we have seen that the interest rate rises have made consumers more attuned to the value and quality of service offered by their bank. Many banks will need to up their game when it comes to the next generation of innovations that will satisfy these consumers.

And if they don’t, they can be sure their competitors will, as they struggle to defend their market share from the fintech players, large technology companies and neo banks.

Mortgages, business banking and retail deposits are all impacted

With customers more sensitive to changes to loan interest rates than changes to deposit interest rates, they are proactive in looking for pricing benefits on mortgages. Though about 35 per cent of the mortgage books at big banks are locked at fixed rates for next 12 months,[1] there is currently a pricing war to retain customers coming out of the dream fixed-rate era as they feel the pinch.

With the fall in property prices forecast to continue, borrowers will demand faster loan approvals, especially in the emerging digital space where consumers expect an unconditional ‘Yes’ in minutes. As one bank executive said in launching a digital platform to speed up approval for mortgage brokers, “Time and certainty are the new currency.”[2] Banks are understandably bullish on lending because of the strong financial position of customers, who have high levels of savings and are generally ahead on their mortgages. We have experienced the lowest unemployment rates in half a century and until it increases, banks are comfortable.

Similarly for business banking, the big banks have been more aggressive and at times used network effects to win business across payments, deposits and loan products. Since the pandemic there has been surging demand for digital payments – in 2021/22 there were more than 1 billion transactions totalling $1 trillion using the New Payments Platform, which enables instant anytime transfers, nearly triple the pre-pandemic levels.[3] Setting up merchant point-of-sale machines have enabled easy cross-selling of deposit checking accounts to those businesses – often the checking account is a mandatory requirement for having the machine. These accounts then provide rich insights into the cash flows of the merchants, which enables almost real-time high-quality credit assessment. And with that comes the ability to cross-sell loan products.

To see these benefits in action, imagine a bank telling a café owner: “Based on increased sales over the past three months, we believe you need an extra coffee machine and if you decide to get it, we can get you a discount from our partner vendors and lend to you at the best interest rate. Click the link below any time in next three months to acquire the machine and we can issue the purchase order within two minutes.”

On the deposits front, banks with bigger customer bases have definite competitive advantages; the cheap and stable source of funds enable these banks to offer extremely slender pricing on loan products. This simple and effective strategy by big banks is a catch-22 situation for neo banks and other small banks, which cannot make many inroads on loan or deposit products. It is much easier for bigger banks to ramp up their deposit base, and with that their overall balance sheet. That is how the Big 4 banks have been able to maintain 75 per cent market share.[4]

Shifting expectations provide strategic opportunities

Given the complexities of rising interest rates, we think there are four steps banks can take to thrive.

1. Understand your customers better. Start by getting to know your customers well – really well. Identify the value customers attach to the propositions or features that you currently offer to them. What gets them to select one bank over another or to stay with their current bank? Which features get their immediate attention and which features do they not bother about? What services would they be willing to pay extra for and what services are priced too high, prompting them to consider changing bank?

   In the past many customers stayed with their existing bank because the process of opening an account with another bank was arduous. This is now changing rapidly, as customers can open accounts within minutes. ANZ Plus, for instance, has demonstrated the impact  – deposits now stand at $1.2 billion.[5]

   Banks need an accurate view of the profitability of their customers, channels and products. which provides actionable insights on products to cross-sell or up-sell. They also benefit from nuanced insights on customers’ current pain points as well as their stated and tacit needs, which are being shaped everyday by digital disruptors. For example, customers are now much more at ease talking on video calls for wealth advice than they were in the past.

2. Create bold value propositions for customers. Banks need to meet the aspirational needs of their customers and think of the long term – helping them to purchase a house or a car, grow their wealth or facilitate their shopping. The lifecycle of a bank customer – from opening a deposit account for basic transactions to helping them achieve their life aspirations – offers many opportunities for banks to be meaningfully engaged and to provide “wow” moments to customers.

   One way to do this is to leverage data (within the confines of privacy consent and the Customer Data Right[6]) to provide hyper-personalised services. Imagine a scenario where banks anticipate the next phase of a customer’s lifecycle using the transaction history and provide recommendations for the purchase of an asset. This recommendation could be based on a customer’s capacity, cash flows and address. It could prompt the bank to identify the right house for her to purchase, saving months of searching, and approving the loan in less than a day. Another scenario might involve a partnership – say, with an e-commerce company – and using a non-financial viral product to grow the number of users on a platform and add payments. Then the bank could follow up by adding the lending products and building an ecosystem or a super app.

3. Experiment to test the value proposition – then scale. The era of multiyear transformation projects is over. But some banks still make the mistake of committing huge investments in technology and resources upfront and then waiting for customers to respond, only to find the investment has not yielded many benefits. The value propositions that banks create need to start with loosely held hypotheses to be tested in a controlled environment before scaling up. Banks can create a minimum viable product (MVP) around the most likely ideas, test them with select customers, observe the changes in the desired metrics, pivot, and test some more before launching it across the bank for a complete set of customers.
4. Redesign operating models to enable the scale up of the propositions. To support experimentation and an agile way of working, banks should develop a fit-for-purpose operating model. Many MVPs can be developed on accessible cloud-based applications. But most banks still make the mistake of starting with technology trends, imitating these and finding the problem it can solve. Many banks struggle with spaghetti-like legacy technology architecture and should consolidate and simplify technology, including moving to cloud- and microservices-based architecture.

   Once a bank has seen the product-market fit and achieved a fair degree of customer acceptance, the technology can be developed by designing the experience layer and user interface (UI), which will determine the core technology requirements for the data architecture, application layer and supporting infrastructure. Banks have traditionally been very hierarchical and low-risk organisations, in part because banking is heavily regulated.

   To build banks of future that can compete with emerging fintech and other digital companies, a collaborative workplace culture is necessary. For example, risk teams need to be involved from the start of product development, rather than brought in near the end. If banks need to experiment with multiple launches and sprints, support functions such as risk teams must work with business and tech teams together from day zero. Global banks DBS and ING have executed this in the past few years, successes that are reflected in their results.

Things are changing rapidly in banking. The banks that will win are the ones who can sharpen their competitive edge. These four domains offer good places to start.

Get in touch to discuss how we can help your bank to thrive.

Connect with Paurush Singh on LinkedIn.

Prepared with input from Tony Fiddes.

Published on 21 November 2022.

[1] Australian Financial Review, Lenders cut costs ahead of surge in fixed rate renewals, 5 August 2022

[2] IT News, AMP digital portal draws in 900 more brokers, 6 September 2022

[3] Reserve Bank of Australia, Payments System Board Annual Report, page 20, 2022

[4] IBIS World, National and Regional Commercial Banks in Australia, 13 July 2022

[5] ANZ, 2022 Full Year Result & Proposed Final Dividend, 27 October 2022

[6] Consumer Data Right, Compliance requirements for data holders