Low interest rates and increasing competition mean that Australia’s traditional banking sector is facing mounting pressures, a CEO has outlined.
Speaking at the Nikko AM “the ripple effect of change breakfast”, founder and CEO of Ark Investment Management Catherine Wood has outlined why banks are under pressure to maintain their balances.
“The banks anywhere in the world have a big problem: it’s called inverted yield curves – their net interest margins are getting crushed and that’s a prime mover of revenues,” Ms Wood explained.
According to the CEO, this technology boom has similar characteristics to the technology boom of the 1920s, where yield curves inverted 60 per cent of the time despite strong economic growth.
“It just so happens that is the last period that was characterised by multiple innovation platforms involving at the same time which were deflationary in nature,” she argued.
She said such “good” deflation “was technologically enabled deflation”.
Another factor placing pressure on the banks’ already thin margins is the growth of fintechs both in Australia and the United States, she pointed out.
Considering “fintech companies are not just nipping at their heels”, Ms Wood said they are going straight for the banks’ business.
Ms Wood stipulated that companies such as investment juggernaut Goldman Sachs with Marcus will also pose a new threat to traditional banks.
“They are offering 3.0 to 3.3 per cent for online deposits, sometimes taking a loss as they are trying to attract assets,” Ms Wood said.
Finally, the CEO cited the introduction of companies such as Square and PayPal’s Venmo and the development of digital wallets will effectively become “banks” in consumers’ pockets.
The cost of Square’s customer acquisition is $20 per user, while a bank’s cost is $300 to $1,500 per credit card, Ms Wood outlined, conceding that “there’s no way traditional banks can compete with Square”.
Ms Wood outlined the progress being made by the online banks in the United States.
“If you look at digital accounts, JP Morgan is number one, PayPal is number two, with Square being number six.”
Square is growing more than 100 per cent while Venmo is growing at 50 per cent per year.
Ms Wood predicted that “they are going to far surpass all the banks”.
“We think what is going to happen to banks is what is going to happen to the retail sector, thanks to Amazon and other online players.
“We think unit growth globally is being understated because the statistics were derived during the industrial age, [and] we are now in the digital age.”
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