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Future of Banking: Fintech Flags Turning Point for Australian Banking

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Future of Banking: Fintech Flags Turning Point for Australian Banking

Highlights

- Technological capabilities will become increasingly important in the Australian banking sector--influencing cost base, product offerings, and risk management capabilities.

- There will be opportunities and challenges for the major banks, regional banks, and other smaller players--each has advantages and disadvantages in the race for tech-driven innovation.

- Fintech may ultimately affect Australian banks' competitive dynamics and thus their credit quality.

Australia, Apr. 30 2019 — Change is coming to Australian banking. S&P Global Ratings believes the country's banking sector is poised for substantial upheaval on the back of fintech developments--both in the products banks offer and the way in which they deliver those products.

The ability of banks to take advantage of financial technology may ultimately affect their competitive dynamics--one of the key considerations in our assessment of credit quality.

In our view, technological developments can give banks the ability to more meaningful differentiate themselves and offer customers improved ways to navigate a complex financial landscape. We expect customers will benefit from increasingly personalized product offerings, as growing availability of data allows banks to see customer financial profiles across multiple institutions and industries, leading to cross industry partnerships and investments.

Over time, customers will come to expect more than just a basic home-loan product or savings account. They will expect their bank to understand their entire financial profile and offer a customized product, much like Netflix and Spotify tailor their product offerings. If today's banks can rise to this challenge, they have an opportunity to offer value beyond a competitive price for a mortgage loan. Equally, those that do not commit to digital transformation risk falling behind.

Economies of scale have traditionally been the crux of competition in Australia's banking industry, but the pursuit of increased efficiencies using technology may come to dominate. Regardless of how different parties achieve such efficiencies, we believe those that want to compete will have to adopt lean operating structures that use technology to minimize operating costs.

Inherent operational risks could increase, but fintech may also play role in risk reduction

In our view, change on this scale comes with inherent risks, from the operational challenges of moving to new core banking systems, to the responsible management of newly available customer data. Nevertheless, we believe there is also scope for significant risk reduction, through initiatives such as real-time payments processing and regulatory technology (Regtech) such as artificial intelligence-driven fraud monitoring.

The application of fintech is wide, but within Australia we believe there will be three key drivers that will help shape the future of banking in Australia (see chart 1).

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